Argument for the District.

304 U.S.

This Court has held that, without any consent of a sovereign state, its taxing agencies may be sued. Mandamus may lie against a taxing district. And it has been held in one case that, where a state law provides a similar remedy, a receiver may be appointed to go into such a district and take over its affairs and operations.

Even the taxing immunity can be waived. This Court has held that a State may waive the tax immunity of its agencies, and that the Federal Government may waive the tax immunity of the agencies which it creates. In this case this Bankruptcy Act can never apply to any district unless there is a finding that the law of the State authorizes it to seek that remedy and authorizes it to carry that remedy to completion.

It is true we have a dual system of State and Federal Governments, but that does not mean that they can not coöperate for the common need. That question was settled by this Court in the Social Security cases. [301 U. S. 548, 619.]

Now, we find the State and the Nation confronted with this difficulty arising out of the limitation of the power of the State to deal with its own taxing agencies and their debts. We find these defaulted bonds in the channels of trade. We find taxing districts impaired in their capacity to carry on and perform the very functions for which they were created, and we say that there is no difficulty in the two units, the State and the Nation, without either one of them in the least receding from its sovereignty, setting up together a common remedy.

Acting Solicitor General Bell filed a memorandum for the United States in No. 757.

Messrs. Guy Knupp and James R. McBride for appellant in No. 772.

Mr. Knupp for the Irrigation District explained the character of the District, the history and extent of its

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Argument for Appellees.

indebtedness and the hopelessness of its financial situation. The court below had misconceived the Ashton case and the nature and purpose of the new legislation. The present Act aims to avoid interference with governmental functions, public agencies, and their fiscal affairs. It deals with voluntary composition. Chapter IX gave power to the court to change the proposed plan of composition. Not so Chapter X. Chapter IX gave power to interfere with fiscal powers and policies of the public debtor. Wright v. Vinton Branch, 300 U. S. 440, is applicable.

Messrs. W. Coburn Cook and Charles L. Childers, with whom Mr. Maurice E. Harrison was on the briefs, for appellees.

Mr. Cook on behalf of appellees explained the peculiar importance of irrigation in California. The control of water is a public trust, embedded in the state constitution and executed through its laws. The work of the Irrigation District is work that the State might itself directly perform, without giving the land owners within the District any voice in the selection of managers and trustees. But California, in order that it might carry out what it conceived to be a state function, has permitted the organization of something like 100 irrigation districts in the State and has conferred upon those districts sovereign powers, the power of taxation, the power to borrow

money.

The legislature itself could perform those functions directly by some department of the State. Instead of that, it chose to give the people greater control, because they were vitally interested. It could have raised revenues by direct taxation upon the entire State, because the purpose would have been public. But realizing that greater justice would be done, it allocated the indebtedness to the districts more directly affected, and thereby

Argument for Appellees.

304 U.S.

permitted the people in those districts to have a voice in those affairs.

One of the greatest powers is that of borrowing money. There is a misunderstanding here as to what fiscal power is affected by this Act. It is true that in the Act everything has been done which could possibly have been thought of in order to relieve the court from the necessity of making a direct order on the district, but the effect upon the fiscal powers goes back to the time of the borrowing of the money.

Each holder of a bond and coupon is entitled to payment out of the bond values of the district in the order in which his bond or coupon has been presented. That makes each bond and coupon a separate class, and the one presented today is entitled to payment before the one presented tomorrow.

This Act would have the same effect as respects the fiscal powers of the district and State as would an exercise of powers to tax income from the bonds-it would tend much more to destroy, because under this Act you take the principal, whereas under the income act, you can take only a portion of the interest.

If this power under this Act is sustained, our great cities, all the taxing districts, sewer districts, road districts, reclamation districts of California-could be forced into bankruptcy.

I believe it is true that a sovereign State as well as a sovereign nation does not have the right to abdicate any sovereign function which is essential to its sovereignty. Perry v. United States, 294 U. S. 330.

The Eleventh Amendment gives us no help. The State may waive its right not to be sued. The fact that these districts can be brought into court under certain conditions in no manner detracts from any essential of sovereignty, because the plaintiff in such case brought against the State is merely permitted to obtain an adju

27

Argument for Appellees.

dication of whatever rights he may have. He is not by waiver of the immunity against suit given the right to assert other or different rights.

The Interstate Commerce Clause does not seem to us. to be analogous.

I know of no principle permitting state or federal governments to waive their power to tax,-a power essential to sovereignty.

The bankruptcy power is not a power essential to the National Government. It was given to the National Government for convenience, for uniformity. It is a sort of regulatory or police power granted to the National Government, and therefore if it comes in conflict with the power of the State, which is essential to the maintenance of the sovereignty of the State, it must give way completely.

This is a bankruptcy act, whether it be called readjustment, or whether it be called composition. The effect of it is to compel certain persons to accept something which they have not contracted to accept. The difference in nomenclature between calling this district a taxing agency or a political subdivision, it seems quite obvious could have no effect upon the inherent powers which Congress may have.

Mr. Cook compared chapter X with chapter IX. One essential difference is that c. X does not require the consent of the State.

The California Enabling Act authorized the filing of a petition under c. IX.

Mr. Childers, on behalf of appellees, maintained that chapters IX and X were alike objectionable. The same classes of agencies are dealt with-arms of the sovereign power of the State. The Ashton case decides that the power of Congress does not extend over the sovereign. function of a State.

Argument for Appellees.

304 U.S.

If the power of bankruptcy extends over these state mandatories in a little way, that is, in a voluntary proceeding, it must follow that it may be exercised against these mandatories without their consent or without the consent of the State. The next logical step is to make that same power apply to the State itself. Congress must have all the power or none; and that is the principle that was announced in the Ashton case. We find nothing in this statute that would seem materially to differentiate it from the Ashton case.

To the great powers assigned to the United States by the Constitution, the States are powerless to add. Those powers are quite sufficient in themselves. The powers not delegated have been reserved to the States and to the people, and as this Court said in United States v. Butler, the Tenth Amendment was to make doubly sure.

It is the people who ultimately have the sovereign power; and the State is not in position to surrender those necessary elements of sovereignty by which it must exist.

A State, through its legislature, may consent to be sued, may surrender its sovereignty in a suit, because that is one of the powers not prohibited, and the legislature has the right to speak for the people to that extent. But it is prohibited from passing any law impairing the obligations of contract. Bankruptcy is necessarily an impairment of contract obligations. The taxing power is one of the highest attributes of sovereignty. If the United States can apply the bankruptcy power to a State, then it can control in the fiscal affairs of the State.

Though the Constitution does not expressly prohibit, State or Federal Governments may not tax each other's instrumentalities, because that would be to affect their sovereign functions. It is not a question of the size of the