MORRIS v. GIBSON RECLAMATION DIST NO 108 (1937)

This is an original proceeding, having for its purpose the obtaining of a decree of this court determining how rental moneys derived by the district from lands that have passed into the ownership of the district by reason of the failure of former landowners to pay installment calls based upon assessments theretofore levied for the improvement and protection of the lands lying within Reclamation District No. 108, should be applied. Stated in other language, on account of the alleged insolvency of the bond fund of the district, should the proceeds of such rentals be applied ratably toward the payment of all the bonds matured or unmatured, and upon matured coupons, ratably, rather than upon matured bonds and coupons, beginning with the earliest maturities.

At all the times mentioned in the proceedings in this cause, Reclamation District No. 108 was, and now is, a regularly organized and existing reclamation district under the laws of the State of California. The lands embraced within the exterior boundaries of the district aggregate approximately 60,000 acres.

On December 8, 1923, there was levied upon the lands lying within the exterior boundaries of said district an assessment in the sum of $3,407,800.69, known as “Assessment No. 5.” Thereafter, proceedings were had under the provisions of section 3480 of the Political Code, providing for the issuance of bonds upon the unpaid portion of said assessment which amounted to the sum of $3,142,000. On January 1, 1925, bonds were issued in the sum of $2,542,000, and on January 1, 1927, a further issue of bonds was made in the sum of $600,000, making a total of the bonds issued by said district of the sum of $3,142,000. The bond issues were secured by assessment No. 5. The bonds so issued began to mature on January 1, 1935, and on the 1st of January thereafter, until and including January 1, 1943, each of said series of bonds being in the total sum of $350,000, save and except the last maturing series, which was in the sum of only $342,000. Interest on said bonds was provided to be paid semiannually, to wit, on July 1st and January 1st of each year; the interest being represented by coupons in the sum of $30 each.

The petitioner alleges that she is the holder of bonds of said district based upon assessment No. 5, in the sum of over $300,000. The petitioner further alleges that she is the owner of unpaid matured coupons in the sum of $69,750. The petitioner further sets forth that under the provisions of section 3480 of the Political Code, bonds have been employed by landowners in the discharge of said assessment in the sum of $1,378,000, and in buying lands at delinquent sales in the sum of $225,000, leaving the amount of said bonds unpaid in the approximate sum of $1,539,000.

It further appears from the pleadings in this cause that under and by virtue of defaults in payment of installment calls based upon assessment No. 5, 20,020 acres have passed from the original owners into the ownership of the district; that approximately 20,000 acres have been eliminated from the burden of assessment No. 5 by reason of the employment of bonds, as heretofore stated, in the discharge of the assessment. That there now remains within the district lands paying assessment calls, an acreage of less than 20,000, estimated in some portions of the pleadings as being only 17,500 acres.

It further appears from the records in this cause that there are unpaid state and county taxes and other assessments, in a sum exceeding $200,000.

At the date of the submission of this cause it appears from the allegations of the petition that there were unpaid and matured bonds as follows, to wit:

The pleadings submitted by the interveners differ from the figures just set forth in the sum of $4,000. Unpaid interest coupons on said bonds are alleged as follows:

The amount of interest falling due January 1, 1937, does not appear. The total of the five installment calls made by the district is the sum of $932,088.55, upon which it is alleged only the sum of $29,613.18 has been paid. That thereafter total redemptions amounted to the sum of $87,875.97. The deficiency in the yield from the calls referred to is alleged by the petitioner to be the sum of $814,583.21. The accuracy of this calculation we have not verified, but the figures which we have set forth show that the deficiency is considerably in excess of half a million dollars.

It is further set forth that the rentals or profits of the lands that had passed into the ownership of the district for the crop years of 1935 and 1936, yielded the sum of $141,000. Whether this sum includes all of the yield of crops for the year 1936 does not definitely appear, but it does represent the amount of money that was in the hands of the respondent, California Gibson, available for payment upon the obligations of the district, including, also, bonds and coupons.

The complaints in intervention admit that the amount of money collected upon the respective calls of installments has been insufficient to pay the respective coupon and bond maturities, and likewise that the moneys received for redemption of lands that have gone delinquent; also, that the amount of moneys received on account of rentals of the lands owned by the district added to the amount received upon the calls does not create a fund sufficient to discharge maturing bonds and coupons; and by way of defense it is further set forth that the moneys received from rentals should be applied to the payment of the earliest maturing coupons and bonds. The principal and interest of coupons maturing January 1, 1935, is fixed at the sum of $167,000, and total moneys received as rentals for the years 1935 and 1936, as heretofore stated herein, out of which sum it appears that the respondent, prior to the issuance of the alternative writ herein, had paid out on account of matured coupons and bonds a sum in excess of $100,000.

Based upon what we have heretofore said, the petitioner contends that the bond fund of Reclamation District No. 108 is hopelessly insolvent. As against the position taken by the petitioner, it is insisted by the interveners that the value of the lands in the district is adequate to discharge all of the indebtedness heretofore mentioned; that approximately 50 per cent. of the original issue of bonds has been retired, as herein set forth, in the use thereof by landowners in discharging the assessment.

It is further argued that the provisions of the reclamation law of this state provide for supplemental assessments in the event that the original assessment upon which the lands are issued proved insufficient to fully discharge the same; that the installment calls are being paid on practically one–third of the indebtedness; and that other liens are being discharged by the use of bonds of the district, greatly to the advantage of the district.

It is also further stated by the intervening district that by the profits realized from the leasing of the lands belonging to the district, and the eventual sale thereof, it is hoped and believed that the indebtedness of the district will eventually be fully paid. Whatever the hopes and beliefs of the intervener district may be, we are compelled to deal only with the present economic condition of the district and the unquestioned inability of the district to meet either its past, present, or future obligations within any definite period of time. That the bond fund of the district is at the present time hopelessly insolvent, and that there is no immediate prospect of any change therein, clearly appears from what we have hereinbefore stated, and proceeding along equitable principles, we are compelled to deal with the present financial condition of the district in determining the rights of bondholders, irrespective of the possibilities of better conditions anticipated by the officers of the district.

That the reclamation law of the state of California differs somewhat from other states, the decisions of whose courts we shall hereafter refer to, is probably true, as we find nothing in the decisions which corresponds to the provision found in section 3480 of the Political Code setting forth that “the lien of any unpaid assessment upon which bonds shall have been issued shall continue until all said bonds, and any refunding bonds which may be issued, shall have been paid in full, and if for any reason any part of such principal or interest of said bonds, or of refunding bonds shall remain unpaid after enforcement of said assessment as in this article provided, the board of supervisors of the main county shall order an additional or supplemental assessment,” etc. This provision is relied upon as differentiating this cause from the cases which we shall hereinafter cite.

In the case of Rohwer v. Gibson, 126 Cal.App. 707, 14 P.(2d) 1051, this court had occasion to refer to this portion of section 3480, supra, and call attention to the fact that the supplemental assessment can only be made after all of the bonds have matured, and also that such supplemental assessment cannot exceed the value of the benefits accruing to the district by reason of the original assessment, citing in support thereof Kadow v. Paul, 274 U.S. 175, 47 S.Ct. 561, 71 L.Ed. 982.

The realization of any moneys available for the payment of bonds by reason of supplemental proceedings depending upon conditions not now ascertainable, and the rights of landowners to contest the same on the ground that such an assessment would exceed the benefits conferred, is such as not to interpose any reasonable defense to the application of equitable principles in determining the question presented in this cause for our determination.

We may here appropriately state that the argument of the respondent that if any apportionment is made of rent moneys, earlier maturing bonds and coupons may outlaw preceding the date of full payment, hardly appeals to us as any reason why other bondholders should be paid nothing, or await payment until prior coupon and bondholders have been fully satisfied. The law provides an adequate remedy for keeping alive all claims against the district.

Section 3466a of the Political Code, so far as material here, relating to the management and control of lands which have come into the ownership of the district, is as follows: “All rentals collected or moneys received by the trustees of the district from such lease of land or for the use or occupation of such land may be applied by them to the payment of the incidental expenses of holding and leasing said lands and to the payment of any other incidental expenses of, or legal charge against the district; provided, however, that all rentals collected or moneys received from lease of land sold to the county treasurer as trustee of the district pursuant to the provisions of sections 3480 or 3480a of this code or for the use or occupation of such land, less the incidental expenses of leasing or holding the same, shall, in the event said district shall be in default for interest or principal payments on any of said bonds issued by said district, be deposited in said county treasury of the main county, to the credit of the bond fund of the district. An amount equal to the revenues derived from each tract by reason of the leasing, use or occupation thereof, less the incidental expenses of leasing and holding same, shall be credited by the county treasurer on the assessment lists against the delinquent charges on said tract.”

The last sentence which we have quoted is practically of no force or effect. It does not pertain to, or attempt to fix the pecuniary rights of any person whomsoever. Its only purpose, as we perceive, is to enable the trustees of the district to have some basis for fixing the value of the lands in the event an attempted sale is made thereof. The portion of the section which is involved herein is that part which directs the payment of surplus funds into the county treasury of the main county, to the credit of the bond fund of the district.

Section 3466a, supra, was added by the Legislature in 1931 (St.1931, p. 773), at a date several years after all the bonds involved in this action were issued and sold, and therefore any change or disposition as to the funds there mentioned would not come within the principles which this court considered in the case of Hershey v. Cole, 130 Cal.App. 683, 20 P.(2d) 972, where a thorough consideration is given of constitutional principles and the authorities cited holding that bonds issued by a reclamation district constitute a contract which cannot be altered or changed by subsequent legislation. The law as it existed at the time of the issuance of the bonds is there shown to be entered into and become a part of the contract, and of course excludes the idea of legislation which does not alter or impair the obligations at the time of the issuance of the bonds, or lessen the fund from which the bond is to be paid. As no such provision, as is contained in section 3466a, supra, existed at the time of the issuance of the bonds, the benefit sought to be conferred by that section could not, of course, have entered into the contemplation of either the Legislature or the bondholder or the trustees of the district at the time of the issuance and sale of the bonds.

This leaves rentals and profits subject, first, to the intentions contemplated by the Legislature at the time of the enactment of the section, subject to the changes in the economic conditions of the district, calling for the interposition of equitable principles.

The interveners likewise rely upon the following portion of section 3480, supra, which reads as follows: “At least ninety days before any interest date of the bonds, including refunding bonds, the county treasurer of the main county shall estimate the amount of money necessary to pay interest and principal maturing on such interest date after crediting thereon the funds in the treasury applicable to the payment thereof, and shall add thereto fifteen per cent. of such aggregate sum to cover possible delinquencies,” etc.

In Cooper v. Gibson, 133 Cal.App. 532, 24 P.(2d) 952, 956, and again in Kimball v. Hastings Tract Reclamation Dist., 137 Cal.App. 687, 31 P.(2d) 417, it was held that installment calls are earmarked, and the moneys received can only be applied for a particular purpose, to wit, the purpose for which the installment is called, and the payment upon the maturing bonds and coupons upon which the installment call is based. With the holding had in those cases we are still agreed, but the moneys derived from rentals and profits on crops is not so earmarked, and the equitable principle to be applied to the latter does not in any wise affect the legal principle by which the moneys derived through installment calls should be disbursed.

In the opinion in Cooper v. Gibson, supra, there appears the following: “As to the appropriation of the moneys received from the leasing or operation of lands, the titles to which have become vested in the district, it would appear that the money so received should be first applied to the payment of the interest due coincident with the period when the installment intended for the payment of such interest became delinquent. This would seem to be the intention of the Legislature by the language used in section 3480, supra, wherein the treasurer, in making his estimate of the amount necessary to pay interest and principal maturing on any date, is directed to credit such funds in the treasury to the payment of such interest and principal. In other words, the amount on hand so received is to be applied to the payment of the interest and principal falling due, to pay which the installment call is made and becomes a part of the fund available for such purpose.”

Without the interposition of any equitable principles arising from the insolvency of the bond fund, we are still of the opinion that the foregoing language is a correct statement of how the moneys should be disbursed. It is probable that the Legislature, at the time of the enactment of section 3480, supra, had no thought of the insolvency of the bond fund, or of the fact that any district would become so heavily in arrears as is shown to be the condition of Reclamation District No. 108. With the interposition of equitable principles the fund derived from rentals may be properly said not to be applicable to the payment of any particular portion of either the bonds or coupons issued by the district, but should be held properly applicable to distribution ratably, as hereinafter set forth.

As to what constitutes insolvency of a reclamation district or of the bond fund of such a district, we have not been cited to, and have not been able to discover any direct adjudication, other than inability of the bond fund to meet accruing obligations. In 14 Ruling Case Law, p. 628, we find the following definitions of “insolvency,” to wit: “It is sometimes used to denote the insufficiency of the entire property and assets of an individual to pay his debts, and this is the general and popular meaning and it is in this sense that the term is used in the present Bankruptcy Act (11 U.S.C.A.). But insolvency is also used in a more restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business,” etc. This latter interpretation appears to be the one followed by the cases hereinafter cited.

In the case of State ex rel. Buckwalter v. Lakeland, 112 Fla. 200, 150 So. 508, 516, 90 A.L.R. 704, Mr. Justice Brown, in an opinion dissenting in part, calls attention to the opinion of the same court in the case of State ex rel. Gillespie v. Carlton, 103 Fla. 810, 138 So. 612, as follows: “All that the bondholder has the real right to demand is that, if necessary to pay his bonds, the debtor taxing unit shall be compelled to so exercise the taxing power as to produce the maximum of cash returns. If, when this is done, the fund on hand and the funds which may reasonably be expected to be raised by taxation within a reasonable time in the future are and will be insufficient to pay within any reasonable time all having a claim against such funds in full, and the taxing unit is, in effect, insolvent, not being able to meet its current obligations as they fall due, then the equitable principle above discussed would become applicable, and hence a pro rata distribution of the fund on hand should in such cases be made, thus equally protecting all those who have claims against the fund.” It is also further said: “Drainage districts organized under the General Drainage Law are not clothed with power to levy and collect taxes without limit to meet debts and other obligations incurred by them. Such tax levies are restricted by the amount of benefits shown from the plan of reclamation, and, when this amount is reached, the power to tax is cut off.”

In Pomeroy's Equity Jurisprudence (4th Ed.) §§ 405–407, the principle is thus stated: “In other words, if the fund is not sufficient to discharge all claims upon it in full, or if the debtor is insolvent, equity will incline to regard all the demands as standing upon an equal footing, and will decree a full rate of distribution or payment.”

The rule followed by the majority of cases, and we think supporting the more equitable and just rule, is that where the taxing power is limited, and there is no inexhaustible power of raising money, and there is a particular fund for the payment of the bonds issued against it, and the amount available is insufficient to pay all of the bonds in full, equitable principles demand a pro rata distribution of such fund. See elaborate annotation, 90 A.L.R. 717.

In Meyers v. Idaho Falls, 52 Idaho, 81, 11 P.(2d) 626, the court had before it a writ of mandate praying that the city treasurer be required to pay certain bonds in full on account of the fact that the statute provided for payment in their numerical order. The court held that all of the bondholders of the series were entitled to participate pro rata where the funds were insufficient, and that the Legislature did not intend that providing for payment according to numerical order should give preference to one bondholder over another.

In Rothschild v. Calumet Park, 350 Ill. 330, 183 N.E. 337, it was held that when for any reason the full collection of a yearly installment assessment for a public improvement is not made, and the fund collected is not sufficient to pay all the yearly installment bonds payable out of such assessment, the deficiency must fall upon all the bondholders, and equity requires that the loss shall be borne ratably by each bondholder, and that it was the duty of the trustee of the district to disburse the funds in that manner.

In Snower v. Hope Drainage District (D.C.) 2 F.Supp. 931, it was held, where the fund was insufficient, that equality was equity.

In Moran v. State, 111 Fla. 429, 149 So. 477, it was held that one bondholder may not enforce by mandamus the payment of interest and principal of bonds to the exclusion of other bondholders of the district when the funds on hand are insufficient to pay all the bonds and coupons in default and in prospective maturity, on the ground that drainage districts are not under the law clothed with power to levy and collect taxes without limit.

In State v. Duncan, 334 Mo. 733, 68 S.W.(2d) 679, 684, we find the following: “The rule announced in many cases is that when a trust fund raised by special assessment is insufficient to pay all having equal claims upon it, payment should be made ratably. If a drainage district be insolvent, as held in Sturdivant Bank Case [State ex rel. Sturdivant Bank v. Little River Drainage Dist., 334 Mo. 753], 68 S.W.(2d) 671, all outstanding bonds (those not due as well as those matured) must be taken into consideration in the apportionment of the fund. If the district is solvent there still must be an apportionment, but it is limited to matured bonds and coupons because in that situation the statute pledges the fund on hand from time to time to the payment of matured (and after that next maturing) principal and interest. We understand this view to be in accord with the following decisions which we cited in the Sturdivant Bank Case, supra, and here referred to again: Rothschild v. Village of Calumet Park, 262 Ill.App. 96, 106; Thomas v. Patterson, 61 Colo. 547, 159 P. 34; Norris v. Montezuma Valley Irr. Dist. (D.C.) 240 F. 825; Norris v. Montezuma Valley Irr. Dist. (C.C.A.) 248 F. 369; Rohwer v. Gibson, 126 Cal.App. 707, 14 P.(2d) 1051.”

In the case of State ex rel. Sturdivant Bank v. Little River Drainage Dist., 334 Mo. 753, 68 S.W. 671, the principles which we have stated are supported in a rather lengthy opinion, citing a number of cases, holding apportionment proper when the fund to be distributed is insufficient and the taxing power is limited; the rule being again stated that a distinction is made between a limited and an inexhaustible taxing power.

We do not need to repeat what was said in the case of Rohwer v. Gibson, supra, nor again list the authorities there cited showing that all moneys collected under special assessments and under the reclamation laws of this state constitute a trust fund pledged as security for the payment of the bonded indebtedness incurred by a reclamation district based upon assessments.

In Kerr Glass Mfg. Corporation v. City of San Buenaventura, 62 P.(2d) 583, 588, the Supreme Court of this state, in an exhaustive opinion, reviews a large number of cases having to do with the question here involved and reaches the conclusion that where there is an insufficiency of the funds in a district not having an inexhaustible taxing power, distribution must be made pro rata. We quote the following from the opinion in that case: “With a large percentage of delinquencies and a reduction of the tax–collecting capacity to furnish a surplus in the general fund wherewith to replenish the bond redemption fund, either now or in the reasonably near future, by the amounts of improvement assessment installments falling due on delinquent property subsequent to its sale to the city, it can scarcely be doubted that the city has properly declared the bond redemption fund insolvent. In such a case it may restrict payments from the bond redemption fund on a pro rata basis among the holders of all bonds remaining unpaid, whether or not the same have matured.”

It may be argued that the concluding words of the quotation above set forth were not necessary to the decision there had, but the principle stated, we think applicable, in order that equitable principles may be applied where the funds are insufficient and there is no immediate prospect of replenishing the fund sufficient to pay all bondholders in full. As said in one of the cases, “equality is equity,” and equality means the inclusion of all claimants or bondholders of the district involved.

We have not set forth any of the cases cited by counsel having to do with mortgages securing the payment of notes due on different dates, for the reason that what we have said herein we think a sufficient answer to all the questions presented for our consideration in this cause.

It appears from the record that preferences have been given by the respondent Gibson, in the payment of the fund derived from rentals, which can, and should be, adjusted among the different bondholders out of subsequent rentals, in order that all of the bondholders may be placed upon an equal basis.

The writ prayed for is hereby granted, to be executed and applied by the respondent Gibson, in the manner just stated.

Mr. Justice PLUMMER delivered the opinion of the court.

We concur: PULLEN, P. J.; THOMPSON, J.