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Docket Number

No. 11342.

Attorney(S)

E.L. McHaney, Jr., of Little Rock, Ark. (James R. Yerger, of Lake Village, Ark., Grover T. Owens and S. Lasker Ehrman, both of Little Rock, Ark., on the brief), for appellant. Arthur J. Johnson, of Star City, Ark. (G.W. Hendricks, of Little Rock, Ark., on the brief), for appellees.

Judges

Archibald K. Gardner
Joseph William Woodrough

Acts

Bankruptcy — Case Administration — Commencement Of A Case — Voluntary Cases

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Smart Summary

Summary of Opinion: Chicot County Drainage Dist. v. Baxter State Bank et al.

Factual and Procedural Background

Plaintiffs (appellees below) were bondholders who brought an action on certain bonds issued by the Chicot County Drainage District (defendant/appellant). Defendant answered that in a bankruptcy proceeding in the United States District Court for the Eastern District of Arkansas a decree had been entered (March 28, 1936) which, in effect, adjudged bondholders entitled to recover approximately $360 on each $1,000 bond and which cancelled and restrained enforcement of the old bonds except as provided in that decree. The bankruptcy proceedings had been initiated June 17, 1935, under amendments to the Bankruptcy Act (U.S.C.A. Title 11, §§ 301–303). Plaintiffs were made parties to the bankruptcy proceedings by publication and by mailed notice which they received, but neither plaintiff appeared in that proceeding. No appeal was taken from the bankruptcy decree. The district court below held the bankruptcy decree void for lack of jurisdiction and entered judgment for the plaintiffs; the defendant appealed. The Court of Appeals affirmed the judgment. A dissenting opinion was filed by Judge Woodrough.

Legal Issues Presented

Whether the bankruptcy decree entered March 28, 1936, in the proceedings under the amendatory Bankruptcy Act (U.S.C.A. Title 11, §§ 301–303) constituted a defense (res judicata) to the plaintiffs' action on the bonds.

Arguments of the Parties

Appellant's Arguments

The defendant pleaded that the bankruptcy decree adjudged bondholders (including the plaintiffs) entitled to recover approximately $360 on each $1,000 bond and that, under the decree, plaintiffs had no valid claim against the district and were forever restrained and enjoined from asserting any claim or demand except as provided in the decree.
The appellant relied on that bankruptcy judgment as a defense to plaintiffs' action (i.e., as res judicata).

Appellees' Arguments

This information was not available in the provided opinion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309	Held that the bankruptcy power of Congress does not extend to the states or their political subdivisions; the amendatory bankruptcy act was unconstitutional as applied to municipalities.	The court relied on this decision to conclude that the amendatory act (U.S.C.A. Title 11, §§ 301–303) which purportedly conferred jurisdiction on the bankruptcy court was unconstitutional, and therefore the bankruptcy court lacked jurisdiction to enter the decree affecting municipal obligations.
Smith v. Chase National Bank, 8 Cir., 84 F.2d 608	Described the bankruptcy court as a court of limited jurisdiction.	Used to support the characterization that the bankruptcy court's jurisdiction is limited and dependent on statutory grant; thus if the statutory grant is unconstitutional, the court lacked jurisdiction.
Nixon v. Michaels, 8 Cir., 38 F.2d 420	Recognized the limited jurisdiction of bankruptcy courts.	Applied to show the bankruptcy court here was a court of limited jurisdiction and that its power depended upon the statute in question.
Wheeling Structural Steel Co. v. Moss, 4 Cir., 62 F.2d 37	Described the statutory limits on a bankruptcy court's powers of composition.	Invoked to illustrate that bankruptcy courts derive their powers from statute and are limited to those powers.
McDonald v. Mabee, 243 U.S. 90, 37 S.Ct. 343, 61 L.Ed. 608, L.R.A. 1917F, 458	Stated that if a decree is void, it cannot be successfully pleaded as res judicata.	The court applied this rule to hold that the bankruptcy decree, being void for want of jurisdiction, could not be asserted as a bar to plaintiffs' action.
Chicago, I. L.R. Co. v. Hackett, 228 U.S. 559, 33 S.Ct. 581, 57 L.Ed. 966	Explained that an unconstitutional statute is inoperative and cannot confer jurisdiction or rights.	Quoted and relied upon to support the proposition that the amendatory statute was as inoperative as if never passed, so no jurisdiction could be derived from it.
Norton v. Shelby County, 118 U.S. 425, 6 S.Ct. 1121, 30 L.Ed. 178	Affirmed the principle that an unconstitutional law is ineffective to confer power.	Used to support the conclusion that the bankruptcy court's asserted jurisdiction, being derived from an unconstitutional statute, was invalid.
Security Savings Bank v. Connell, 198 Iowa 564, 200 N.W. 8, 36 A.L.R. 486	Considered the effect of judgments entered under laws later declared unconstitutional; held such statutes cease to be effective and judgments based upon them are not binding as to the continued validity of the underlying law.	Quoted to show that decrees rendered under an unconstitutional statute cannot be sustained as if the statute were valid; the decision supported treating the bankruptcy decree as void.
Servonitz v. State, 133 Wis. 231, 113 N.W. 277, 126 Am.St.Rep. 955	Referenced in discussion of the legal effect of statutes later declared unconstitutional.	Invoked as additional authority for the proposition that proceedings under an unconstitutional statute must be considered void.
Woods Bros. Construction Co. v. Yankton County, 8 Cir., 54 F.2d 304	Addressed jurisdictional questions where the court's jurisdiction was not dependent upon a statute later declared unconstitutional.	The court distinguished this case, noting it is not in conflict because there the court had jurisdiction independent of the subsequently invalidated statute; here the bankruptcy court's only authority derived from the amendatory act.

Court's Reasoning and Analysis

The court framed the controlling question as whether the bankruptcy decree constituted a defense to the action on the bonds. The steps of the court's reasoning were:

The bankruptcy proceedings were conducted under the amendatory Bankruptcy Act (U.S.C.A. Title 11, §§ 301–303) enacted May 24, 1934, which prescribed procedures for municipal debt readjustment; the decree at issue purported to cancel the district's obligations and restrain enforcement by bondholders.
The Supreme Court subsequently held that the amendatory act was unconstitutional insofar as it attempted to subject states and their political subdivisions to bankruptcy power (Ashton v. Cameron County Water Improvement Dist.). That holding established that the bankruptcy power does not extend to states or municipalities.
Because bankruptcy courts are courts of limited jurisdiction whose authority to act in municipal readjustment proceedings was dependent upon the amendatory statute, the bankruptcy court here had no jurisdiction if the statute conferring such jurisdiction was unconstitutional (citing Smith v. Chase National Bank; Nixon v. Michaels; Wheeling Structural Steel Co. v. Moss).
The court applied the principle that when the statutory source of a court's jurisdiction is unconstitutional, the proceedings under that statute are void and cannot confer rights or operate as law (citing Chicago, I. L.R. Co. v. Hackett; Norton v. Shelby County; and treatises/cases discussing voidness of proceedings under unconstitutional statutes).
Relying on McDonald v. Mabee and related authorities, the court concluded that a void decree cannot be successfully pleaded as res judicata.
The court distinguished Woods Bros. Construction Co. v. Yankton County, noting that in Woods Bros. the court's jurisdiction did not depend upon the later-declared-unconstitutional statute, whereas here the bankruptcy court's only authority to act derived from that amendatory statute.
Because the amendatory act was unconstitutional and thus incapable of conferring jurisdiction, the decree entered by the bankruptcy court was a nullity and could not constitute a defense to the plaintiffs' action.

Holding and Implications

Holding: Judgment affirmed.

The court held that the bankruptcy decree entered March 28, 1936, was void for lack of jurisdiction because the amendatory Bankruptcy Act under which the bankruptcy court purported to act was unconstitutional. Consequently, the decree was a nullity and could not be pleaded as res judicata; the plaintiffs were entitled to recover on their bonds and the district court's judgment for the plaintiffs was affirmed.

The opinion notes a dissent by Judge Woodrough, who argued that unappealed judicial decrees entered during the interim between enactment and invalidation of the statute should be given full faith and credit and not retroactively nullified by the Supreme Court's later decision. The majority's disposition is the direct effect on the parties: the bankruptcy decree does not bar plaintiffs' recovery. The opinion does not state that it establishes a broader new precedent beyond applying the cited authorities and principles concerning jurisdiction derived from unconstitutional statutes.

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CHICOT COUNTY DRAINAGE DIST. v. BAXTER STATE BANK et al.

GARDNER, Circuit Judge.

This is an appeal from a judgment entered in favor of appellees, who were plaintiffs below, in an action on certain bonds owned by them and issued by the appellant Drainage District. The parties will be referred to as they appeared in the lower court. No question is raised as to the sufficiency of the pleadings. The defendant answered plaintiffs' complaint, which was in conventional form, pleading that in a bankruptcy proceeding brought in the United States District Court for the Eastern District of Arkansas, it had been adjudged in effect that the bondholders of the district, including the plaintiffs, were entitled to recover in that proceeding the sum of approximately $360 on each $1,000 bond; that under the terms and provisions of said decree, plaintiffs had no valid claim against the defendant but were forever restrained and enjoined from asserting any claim or demand whatever against defendant, except as provided in said decree.

The bankruptcy proceedings referred to were initiated on June 17, 1935, by filing in the United States District Court for the Eastern District of Arkansas, a petition for authority to effect a plan of debt readjustment, pursuant to amendments to the Bankruptcy Act, adopted May 24, 1934, and designated as U.S.C.A. Title 11, Sections 301, 302 and 303. No question is raised as to the regularity of these proceedings as prescribed by the Act. Plaintiffs were made parties to said proceedings by publication of a notice thereof pursuant to order of the bankruptcy court, and by mailing to them personally a notice of said proceedings, which notice was received by each of them, but neither of them appeared therein either in person or by attorney. The decree which was entered therein on March 28, 1936, provided in part as follows: "(c) That all the old bonds and other obligations of the petitioning district affected by the plan of debt readjustment approved in this cause, whether heretofore surrendered and cancelled or remaining outstanding, and by whomsoever held, are hereby cancelled, annulled and held for naught as enforceable obligations of the petitioning district, except as herein provided, and that the holders thereof be and they are hereby forever restrained and enjoined from other wise asserting any claim or demand whatsoever therefor as against the petitioning district or its officers, or against the property situated therein or the owners thereof;"

No appeal was taken by the plaintiffs from the bankruptcy decree above referred to.

The lower court held that the decree in bankruptcy entered March 28, 1936, was void because the court was without jurisdiction of the parties plaintiff or of the subject matter; that the plaintiffs were therefore entitled to recover the full amount of their bonds, and judgment was entered accordingly.

The determining question on this appeal is whether the bankruptcy decree constituted a defense to the maintenance of this action. The act amendatory of the bankruptcy laws under which the proceedings were had, culminating in the above-mentioned decree, was, subsequent to the entry of the decree, held to be unconstitutional because it materially restricted the states in the control of their financial affairs. Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309. It was held in that decision that the bankruptcy power of Congress does not extend to the states or their political subdivisions. This decree, as has been observed, purported to cancel the obligations upon which the present suit was brought. The bankruptcy court rendering the decree here pleaded as res judicata was a court of limited jurisdiction. Smith v. Chase National Bank, 8 Cir., 84 F.2d 608; Nixon v. Michaels, 8 Cir., 38 F.2d 420. Its powers of compositions were fixed and limited by statute. Wheeling Structural Steel Co. v. Moss, 4 Cir., 62 F.2d 37. Its jurisdiction was therefore wholly dependent upon the amendatory act which was held to be unconstitutional in Ashton v. Cameron County Water Improvement District, supra. The act itself (Title 11 U.S.C.A. §§ 301- 303) indicates that Congress was of the view that the bankruptcy court was without jurisdiction except as it might be conferred by that act. Section 302 provides as follows: "Until January 1, 1940, in addition to the jurisdiction exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, courts of bankruptcy shall exercise original jurisdiction in proceedings for the relief of debtors, as provided in this chapter of this title."

Then follows Section 303, which provides that a municipality or other political subdivision may file a petition setting out that the district is insolvent or unable to meet its debts, and submitting a plan of readjustment. The requirements of the petition are described in the act, and it is provided that upon the filing of such petition, the judge shall enter an order either approving or dismissing it.

Without further detailing the proceedings purported to be authorized by the act, it is sufficient for the purpose of this opinion to state that the proceeding taken was that prescribed by the statute, and if the court acquired jurisdiction, it was because of a compliance with the procedure so prescribed, and not otherwise.

If the decree was void, it could not be successfully pleaded as res judicata. McDonald v. Mabee, 243 U.S. 90, 37 S.Ct. 343, 61 L.Ed. 608, L.R.A. 1917F, 458. The act which purported to confer jurisdiction, being unconstitutional, was void and in legal contemplation was inoperative. Chicago, I. L.R. Co. v. Hackett, 228 U.S. 559, 33 S.Ct. 581, 57 L.Ed. 966; Norton v. Shelby County, 118 U.S. 425, 6 S.Ct. 1121, 30 L.Ed. 178; Security Savings Bank v. Connell, 198 Iowa 564, 200 N.W. 8, 36 A.L.R. 486; Servonitz v. State, 133 Wis. 231, 113 N.W. 277, 126 Am.St.Rep. 955; 1 Black on Judgments, Sec. 216.

In Chicago, I. L.R. Co. v. Hackett, supra, Mr. Justice Lurton, speaking for the Supreme Court with reference to the effect of an unconstitutional statute, said [ 228 U.S. 559, 33 S.Ct. 584]: "That act was therefore as inoperative as if it had never been passed, for an unconstitutional act is not a law, and can neither confer a right or immunity nor operate to supersede any existing valid law."

In Security Savings Bank v. Connell, supra, the Supreme Court of Iowa considered a plea of res judicata in which the judgments relied upon were based upon laws later declared to be unconstitutional. In the course of that opinion it is said [ 198 Iowa 564, 200 N.W. 10]: "If the decrees were merely erroneous, it may be conceded the rule contended for would apply, and they would still be binding as adjudications of the matter then and now at issue, the right to deduct from the value of the shares of stock of the bank in arriving at the assessed value of the stock the amount of tax-exempt government obligations held by it. It is doubtless true, as argued by appellant, that the constitutionality of the statute in question could have been raised in the proceedings resulting in the decrees now relied upon as an estoppel; that it was as unconstitutional then as when so declared; and that it must be assumed it would have been so held had the question been then raised. But that contention does not fully meet the situation. Not only was the statute open to attack on constitutional grounds at the time the prior decrees were rendered, but when it was by this court declared to be unconstitutional it ceased to be, as effectually as if it had never been passed."

Mr. Black, in his work on judgments, Volume 1, Section 216, supra, states the applicable rule as follows: "But if the alleged jurisdiction of a court to take any particular action is derived from a statute, and that statute is shown to be unconstitutional, the proceedings of the court must be considered void, for as the stream cannot rise higher than its source, no jurisdiction can be derived from a void act."

The rule laid down by this court in Woods Bros. Construction Co. v. Yankton County, 8 Cir., 54 F.2d 304, is not in conflict. In that case, the jurisdiction of the court was not dependent upon the statute that had been declared unconstitutional after the entry of judgment. It was contended that the court had no jurisdiction to enter the original judgment. But we held that the court did have such jurisdiction. Here, the only authority of the bankruptcy court to act was dependent upon and derived from the statute which was declared by the Supreme Court to be unconstitutional. The decree entered was a nullity and constituted no defense to plaintiffs' action.

The judgment appealed from is therefore affirmed.

WOODROUGH, Circuit Judge (dissenting).

The appellant herein relies upon a judgment rendered by the District Court in a bankruptcy case during the interim between the time the Congress enacted the municipal corporations amendment to the Bankruptcy Act and the time the Supreme Court declared it unconstitutional. The question is, during that interim what was the state of our government in respect to that legislation? I assume that as to the acts of the Executive branch of the government founded thereon, they simply lost the sanction of the law when the law was held invalid. Probably the same is true as to administrative or quasi-judicial bodies. But it seems to me that our duly constituted courts, sitting in the various districts and circuits throughout the nation, functioning in equity, law or bankruptcy, remained clothed with judicial power, including the power to pass on the constitutionality of the law and that their solemn judgments in all cases, including bankruptcy cases, ought to be given full faith and credit unless appealed from and reversed. The amendment to the Bankruptcy Act affected very large property rights. I think it ought not to be held that there was a hiatus of governmental power in respect to them, or that the Supreme Court decision annulling the amendment operated retroactively to render void the final unappealed from judgments of all the courts that had passed on the amendment and adjudicated rights between litigants in respect to it. It ought to be held that government by law is continuous at least in the courts of the nation.

CHICOT COUNTY DRAINAGE DIST. v. BAXTER ST. BK