1. Proceedings for voluntary composition of debts without
adjudication of bankruptcy are within the scope of the bankruptcy
power. P.
304 U. S.
47.
2. California Law, 1934, Extra Sess., gave the State's consent
to the application to state "taxing districts," of the Bankruptcy
Act and amendments, including Chapter X, added to that Act Aug. 16,
1937. P.
304 U. S.
47.
3. The omission from c. X of the Bankruptcy Act of a provision
specifically requiring that the petition of a state taxing district
under that chapter be approved by a governmental agency of the
State
held unimportant in determining the validity of the
legislation where the State has actually consented. P.
304 U. S.
49.
4. In conditioning the confirmation of a plan of composition
upon proof that the petitioning taxing district is "authorized by
law" to take all action necessary to carry out the plan, c. X of
the Bankruptcy Act refers to the law of the State. P.
304 U. S.
49.
5. Chapter X of the Bankruptcy Act, adopted Aug. 16 1937,
empowers the courts of bankruptcy to entertain and pass upon
petitions by state taxing agencies or instrumentalities, including
irrigation districts, for the composition of their indebtedness
payable out of assessments or taxes levied against and constituting
liens upon property in their districts or out of income derived
therefrom or from sale or water, etc. The plan of composition must
be approved by creditors owning not less than 51% of the securities
affected by the plan, and cannot be confirmed unless accepted by
creditors holding 66 2/3% of the aggregate indebtedness of the
district. There must be consent by the State, and the judge must be
satisfied that the district is authorized by local law to carry out
the plan. The statute aims to relieve serious distress existing in
many such improvement districts where, because of economic
conditions, property owners cannot pay assessments, and taxation is
useless, so that the districts cannot meet
Page 304 U. S. 28
their obligations and creditors are helpless. A remedy through
composition of the debts of the district could not be afforded by
state law unaided, because of the contract clause of the Federal
Constitution.
Held that the statute is a valid exercise of
the bankruptcy power.
Ashton v. Cameron County District,
298 U. S. 513,
distinguished. P.
304 U. S.
49.
6. The ability to contract and to give consents bearing upon the
exertion of governmental power is of the essence of sovereignty. P.
304 U. S.
51.
7. The reservation to the States by the Tenth Amendment, did not
destroy, but protected, their right to make contracts and give
consents where that action would not contravene the provisions of
the Federal Constitution. P.
304 U. S.
52.
8. Cooperation between Nation and State through the exercise of
the powers of each, to the advantage of the people who are citizens
of both, is consistent with an indestructible Union of
indestructible States. P.
304 U. S.
53.
9. Chapter X of the Bankruptcy Act
held not violative
of the Fifth Amendment, as applied to creditors of a state
irrigation district, which sought a composition of its debts under
that chapter. P.
304 U. S.
54.
21 F. Supp.
129 reversed.
Appeals from a decree of the District Court dismissing a
petition for confirmation of a plan of composition presented by the
above-named Irrigation District under c. X of the Bankruptcy Act.
The District and the United States, which had been notified and had
intervened, took separate appeals.
Page 304 U. S. 45
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
These are direct appeals from the judgment of the District Court
for the Southern District of California under the Act of August 24,
1937, c. 754, 50 Stat. 751. They present the question of the
constitutional validity of the Act of August 16, 1937, 50 Stat.
653, amending the Bankruptcy Act by adding chapter 10 providing for
the composition of indebtedness of the taxing agencies or
instrumentalities therein described. A certificate was issued to
the Attorney General, and the United States intervened. The
District Court held the statute invalid as applied to the
appellant, and dismissed its petition for composition. The court
considered itself bound by the decision in
Ashton v. Cameron
County District, 298 U. S. 513.
Appellant the Lindsay-Strathmore Irrigation District was
organized in the year 1915 under the California Irrigation District
Act of March 31, 1897, Stat.Cal. 1897, p. 254. It comprises about
15,260 acres in Tulare County. It is an irrigation district and
taxing agency created for the purpose of constructing and operating
irrigation projects and works devoted to the improvement of lands
for
Page 304 U. S. 46
agricultural purposes. On September 21, 1937, it presented its
petition for the confirmation of a plan of composition. The
petition alleged insolvency; that its indebtedness consisted of
outstanding bonds aggregating $1,427,000 in principal, with unpaid
interest of $439,085.15; that no interest or principal falling due
since July 1, 1933, had been paid; that the low price of
agricultural products had prevented the owners of land within the
irrigation district from meeting their assessments; that, upon the
assessment levied by the District in the year 1932, there was a
delinquency of 47 percent, and that, since that year, there had
been levied only an assessment of sufficient amount to maintain and
operate its works; that the District's plan for the composition of
its debts provided for the payment in cash of a sum equal to 59.978
cents for each dollar of the principal amount of its outstanding
bonds in satisfaction of all amounts due; that creditors owning
about 87 percent in the principal amount of the bonds had accepted
the plan and consented to the filing of the petition, and that
payment of the amount required was to be made from the proceeds of
a loan which the Reconstruction Finance Corporation had agreed to
make upon new refunding serial bonds equal to the amount borrowed
and bearing interest at 4 percent
The District Court approved the petition as filed in good faith,
and directed the creditors to show cause why an injunction should
not issue staying the commencement of suits upon the securities
affected by the plan. The appellees, as bondholders, appeared and
moved to dismiss the petition upon the ground that chapter X of the
Bankruptcy Act violated the Fifth and Tenth Amendments of the
Federal Constitution. It appeared from the return to the order to
show cause that these creditors had obtained an alternative writ of
mandate from the state court directing the county board of
supervisors to levy an assessment upon the lands within the
District sufficient to pay
Page 304 U. S. 47
the amounts due the complaining creditors, and that the
proceedings in that court had been suspended pending the proceeding
in the bankruptcy court.
First. Chapter X of the Bankruptcy Act is limited to
voluntary proceedings for the composition of debts. Aside from the
question as to the power of the Congress to provide this method of
relief for the described taxing agencies, it is well settled that a
proceeding for composition is in its nature within the federal
bankruptcy power. Compositions were authorized by the Bankruptcy
Act of 1867, § 43, 14 Stat. 538, as amended by the Act of 1874, c.
390, § 17, 18 Stat. 182. It is unnecessary to the validity of such
a proceeding that it should result in an adjudication of
bankruptcy.
In re Reiman, 20 Fed.Cas. 490, 496, 497;
Continental National Bank v. Chicago, R.I. & P. Ry.
Co., 294 U. S. 648,
294 U. S.
672-673. In the
Continental Bank case, in the
course of a full consideration of the scope of the federal
bankruptcy power and of the evolution of its exercise, we said:
"The constitutionality of the old provision for a composition is
not open to doubt.
In re Reiman, 20 Fed.Cas. pages 490,
496, 497, cited with approval in
Hanover National Bank v.
Moyses, supra, [186 U.S. at
186 U. S.
187]. That provision was there sustained upon the broad
ground that the 'subject of bankruptcies' was nothing less than
'the subject of the relations between an insolvent or nonpaying or
fraudulent debtor, and his creditors, extending to his and their
relief.' That it was not necessary for the proceedings to be
carried through in bankruptcy was held not to warrant the objection
that the provision did not constitute a law on the subject of
bankruptcies."
Second. It is unnecessary to consider the question
whether Chapter X would be valid as applied to the irrigation
district in the absence of the consent of the State which created
it, for the State has given its consent. We think that this
sufficiently appears from the statute of California enacted in
1934. Laws of 1934, Ex.Sess.,
Page 304 U. S. 48
c. 4. This statute (§ 1) adopts the definition of "taxing
districts" as described in an amendment of the Bankruptcy Act,
to-wit, Chapter IX, approved May 24, 1934, and further provides
that the Bankruptcy Act and "acts amendatory and supplementary
thereto, as the same may be amended from time to time, are herein
referred to as the
Federal Bankruptcy Statute.'" Chapter X of
the Bankruptcy Act is an amendment, and appears to be embraced
within the state's definition. We have not been referred to any
decision to the contrary. Section 3 of the state act then provides
that any taxing district in the State is authorized to file the
petition mentioned in the "Federal Bankruptcy Statute." Subsequent
sections empower the taxing district, upon the conditions stated,
to consummate a plan of readjustment in the event of its
confirmation by the federal court. The statute concludes with a
statement of the reasons for its passage, as follows:
"There exist throughout the California economic conditions which
make it impossible for property owners to pay their taxes and
special assessments levied upon real or taxable property. The
burden of such taxes and special assessments is so onerous in
amount that great delinquencies have occurred in the collection
thereof and seriously affect the ability of taxing districts to
obtain the revenue necessary to conduct governmental functions and
to pay obligations represented by bonds. It is essential that
financial relief, as set forth in this act, be immediately afforded
to such taxing districts in order to avoid serious impairment of
their taxing systems, with consequent crippling of the local
governmental functions of the State. This act will aid in
accomplishing this necessary result and should therefore go into
effect immediately."
Section 13.
While the facts thus stated related to conditions in California,
similar conditions existed in other parts of the
Page 304 U. S. 49
country, and it was this serious situation which led the
Congress to enact Chapter IX and later Chapter X. [
Footnote 1]
Our attention has been called to the difference between § 80(k)
of chapter IX and § 83(i) of Chapter X of the Bankruptcy Act in the
omission from the latter of the provision requiring the approval of
the petition by a governmental agency of the State whenever such
approval is necessary by virtue of the local law. We attach no
importance to this omission. It is immaterial, if the consent of
the State is not required to make the federal plan effective, and
it is equally immaterial if the consent of the State has been
given, as we think it has in this case. It should also be observed
that Chapter X, § 83(e), provides as a condition of confirmation of
a plan of composition that it must appear that the petitioner "is
authorized by law to take all action necessary to be taken by it to
carry out the plan," and, if the judge is not satisfied on that
point as well as on the others mentioned, he must enter an order
dismissing the proceeding. The phrase "authorized by law"
manifestly refers to the law of the state.
Third. We are thus brought to the inquiry whether the
exercise of the federal bankruptcy power in dealing with a
composition of the debts of the irrigation district, upon its
voluntary application and with the State's consent, must be deemed
to be an unconstitutional interference with the essential
independence of the State as preserved by the Constitution.
In
Ashton v. Cameron County District, supra, the court
considered that the provisions of chapter IX authorizing
Page 304 U. S. 50
the bankruptcy court to entertain proceedings for the
"readjustment of the debts" of "political subdivisions" of a State
"might materially restrict [its] control over its fiscal affairs,"
and was therefore invalid; that, if obligations of States or their
political subdivisions might be subjected to the interference
contemplated by chapter IX, they would no longer be "free to manage
their own affairs."
In enacting Chapter X, the Congress was especially solicitous to
afford no ground for this objection. In the report of the Committee
on the Judiciary of the House of Representatives, [
Footnote 2] which was adopted by the Senate
Committee on the Judiciary, [
Footnote 3] in dealing with the bill proposing to enact
Chapter X, the subject was carefully considered. The Committee
said:
"Compositions are approvable only when the districts or agencies
file voluntary proceedings in courts of bankruptcy accompanied by
plans approved by 51 percent of all the creditors of the district
or agency, and by evidence of good faith. Each proceeding is
subject to ample notice to creditors, thorough hearings, complete
investigations, and appeals from interlocutory and final decrees.
The plan of composition cannot be confirmed unless accepted in
writing by creditors holding at least 66 2/3 percent of the
aggregate amount of the indebtedness of the petitioning district or
taxing agency, and unless the judge is satisfied that the taxing
district is authorized by law to carry out the plan, and until a
specific finding by the court that the plan of composition is fair,
equitable, and for the best interests of the creditors. . . ."
"The Committee on the Judiciary is not unmindful of the sweeping
character of the holding of the Supreme Court above referred to [in
the
Ashton case], and believes
Page 304 U. S. 51
that H.R. 5969 is not invalid or contrary to the reasoning of
the majority opinion. . . ."
"The bill here recommended for passage expressly avoids any
restriction on the powers of the States or their arms of government
in the exercise of their sovereign rights and duties. No
interference with the fiscal or governmental affairs of a political
subdivision is permitted. The taxing agency itself is the only
instrumentality which can seek the benefits of the proposed
legislation. No involuntary proceedings are allowable, and no
control or jurisdiction over that property and those revenues of
the petitioning agency necessary for essential governmental
purposes is conferred by the bill. . . ."
"There is no hope for relief through statutes enacted by the
States, because the Constitution forbids the passing of State laws
impairing the obligations of existing contracts. Therefore, relief
must come from Congress, if at all. The committee are not prepared
to admit that the situation presents a legislative no-man's land. .
. . It is the opinion of the committee that the present bill
removes the objections to the unconstitutional statute, and gives a
forum to enable those distressed taxing agencies which desire to
adjust their obligations and which are capable of reorganization,
to meet their creditors under necessary judicial control and
guidance and free from coercion, and to affect such adjustment on a
plan determined to be mutually advantageous."
We are of the opinion that the Committee's points are well
taken, and that Chapter X is a valid enactment. The statute is
carefully drawn so as not to impinge upon the sovereignty of the
State. The State retains control of its fiscal affairs. The
bankruptcy power is exercised in relation to a matter normally
within its province, and only in a case where the action of the
taxing agency in carrying out a plan of composition approved by the
bankruptcy court is authorized by state law. It is of the
essence
Page 304 U. S. 52
of sovereignty to be able to make contracts and give consents
bearing upon the exertion of governmental power. This is constantly
illustrated in treaties and conventions in the international field
by which governments yield their freedom of action in particular
matters in order to gain the benefits which accrue from
international accord. Oppenheim, International Law, 4th Ed., vol.
1, §§ 493, 494; Hyde, International Law, vol. 2, § 489;
Perry
v. United States, 294 U. S. 330,
294 U. S. 353;
Steward Machine Co. v. Davis, 301 U.
S. 548,
301 U. S. 597.
The reservation to the States by the Tenth Amendment protected, and
did not destroy, their right to make contracts and give consents
where that action would not contravene the provisions of the
Federal Constitution. The States, with the consent of Congress, may
enter into compacts with each other, and the provisions of such
compacts may limit the agreeing States in the exercise of their
respective powers. Const. art. 1, § 10, cl. 3;
Poole v.
Fleeger, 11 Pet. 185,
36 U. S. 209;
Rhode Island v.
Massachusetts, 12 Pet. 657,
37 U. S. 72;
Hinderlider v. La Plata River Co., post, p.
304 U. S. 92 The
State is free to make contracts with individuals and give consents
upon which the other contracting party may rely with respect to a
particular use of governmental authority.
See Fletcher v.
Peck, 6 Cranch 87,
10 U. S. 137;
New Jersey v.
Wilson, 7 Cranch 164;
Dartmouth
College v. Woodward, 4 Wheat. 518,
17 U. S.
643-644;
Charles River Bridge v. Warren
Bridge, 11 Pet. 420,
36 U. S. 549;
Jefferson Branch Bank v.
Skelly, 1 Black 436,
66 U. S. 446.
While the instrumentalities of the national government are immune
from taxation by a State, the State may tax them if the national
government consents (
Baltimore National Bank v. State Tax
Comm'n, 297 U. S. 209,
297 U. S.
211-212) and, by a parity of reasoning, the consent of
the State could remove the obstacle to the taxation by the federal
government of state agencies to which the consent applied.
Page 304 U. S. 53
Nor did the formation of an indestructible Union of
indestructible States make impossible cooperation between the
Nation and the States through the exercise of the power of each to
the advantage of the people who are citizens of both. We had recent
occasion to consider that question in the case of
Steward
Machine Company v. Davis, supra, in relation to the operation
of the Social Security Act of August 14, 1935, 49 Stat. 620. The
question was raised with special emphasis in relation to § 904 of
the statute and the parts of § 903 complementary thereto, by which
the Secretary of the Treasury is authorized to receive and hold in
the Unemployment Trust Fund all moneys deposited therein by a state
agency for a state unemployment fund and to invest in obligations
of the United States such portion of the Fund as is not in his
judgment required to meet current withdrawals. The contention was
that Alabama, in consenting to that deposit, had "renounced the
plenitude of power inherent in her statehood." 301 U.S. at
301 U. S.
595-596. We found the contention to be unsound. As the
States were at liberty upon obtaining the consent of Congress to
make agreements with one another, we saw no room for doubt that
they may do the like with Congress if the essence of their
statehood is maintained without impairment. And we added that:
"Nowhere in our scheme of government -- in the limitations
express or implied of our Federal Constitution -- do we find that
she [the State] is prohibited from assenting to conditions that
will assure a fair and just requital for benefits received."
In the instant case, we have cooperation to provide a remedy for
a serious condition in which the States alone were unable to afford
relief. Improvement districts, such as the petitioner, were in
distress. Economic disaster had made it impossible for them to meet
their obligations. As the owners of property within the boundaries
of the district could not pay adequate assessments, the power
of
Page 304 U. S. 54
taxation was useless. The creditors of the district were
helpless. The natural and reasonable remedy through composition of
the debts of the district was not available under state law by
reason of the restriction imposed by the Federal Constitution upon
the impairment of contracts by state legislation. The bankruptcy
power is competent to give relief to debtors in such a plight and,
if there is any obstacle to its exercise in the case of the
districts organized under state law, it lies in the right of the
State to oppose federal interference. The State steps in to remove
that obstacle. The State acts in aid, and not in derogation, of its
sovereign powers. It invites the intervention of the bankruptcy
power to save its agency which the State itself is powerless to
rescue. Through its cooperation with the national government, the
needed relief is given. We see no ground for the conclusion that
the Federal Constitution, in the interest of state sovereignty, has
reduced both sovereigns to helplessness in such a case.
Fourth. As the bankruptcy power may be exerted to give
effect to a plan for the composition of the debts of an insolvent
debtor, we find no merit in appellant's objections under the Fifth
Amendment.
In re Reiman, supra; Continental National Bank v.
Chicago, Rock Island & Pacific R. Co., supra.
The judgment of the District Court is reversed, and the cause is
remanded for further proceedings in conformity with this
opinion.
Reversed.
MR. JUSTICE McREYNOLDS and MR. JUSTICE BUTLER are of the opinion
that the principle approved in
Ashton v. Cameron County
District, 298 U. S. 513, is
controlling here, and requires affirmation of the questioned
decree.
MR. JUSTICE CARDOZO took no part in the consideration and
decision of this case.
[
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.;
Ashton v. Cameron County District, 298 U.
S. 513,
298 U. S.
533-534.
[
Footnote 2]
H.Rep. No. 517, 75th Cong., 1st Sess.
[
Footnote 3]
Sen.Rep. No. 911, 75th Cong., 1st Sess.