Morgan v. United States, 304 U.S. 1 (1938)

Nothing occurred in the course of the oral argument to forecast the fact that the Assistant Secretary was not to pass upon the issues but was to retire from further p. 7consideration of the case. No statement indicated that a tentative report was to be prepared by the attorneys for the Government and a Government economist, an important witness for the Government. It was not suggested that the proposed findings and order, without having been first served upon counsel for appellants, would be presented to the Secretary personally and discussed with him by the attorneys for the Government in unrecorded conferences, out of the presence of appellants’ counsel. Appellants’ counsel, without the benefit of a complaint containing specific allegations as to the unreasonableness of any rates, having before him in the evidence a cost study prepared after extensive audits by Government accountants showing experienced costs to be in excess of receipts under existing rates, and without any knowledge of the contents of the tentative report, prepared a brief which was filed with the Assistant Secretary. No briefs were filed or served by the Government.

It is not contended by appellants that in cases where a fair and proper method has been adopted for limiting the issues, whether it be a tentative report of the Examiner or otherwise, the tribunal passing judgment must review or appraise all of the evidence relating to non-controversial as well as controversial issues. Nor is it contended that in order that there be a full hearing, oral argument or oral presentation is essential in every instance—for by other methods the trier of the facts may become so adequately informed as to enable himself to properly appraise the evidence. Nor is it contended that the order is void solely by reason of the fact that the attorneys for the prosecution, assisted by a witness for the prosecution, prepared it,—for had such an order, so prepared, been followed by presentation of it to counsel for appellants with full opportunity to refute the conclusions expressed therein before him whose duty it was to resolve the evidence into findings, the requirement of a fair trial p. 9could be met if the Secretary weighed and appraised all of the evidence upon the findings questioned by appellants’ counsel. A court or administrative tribunal may for its convenience require submission of issues upon written statement—if such written statements are, under conditions fairly permitting reply, made known to opposing parties. Evidence may for the assistance of the one charged with the responsibility of decision be fairly analyzed by impartial and competent assistants, unbiased by previous partisan connection with the proceeding. Where, however, issues are not defined and limited by means and methods fair to all persons affected or to be affected, fair analyses or synopses of the evidence are not prepared by impartial or competent assistants, and the one deciding the issues does not personally review and weigh and appraise the evidence, a full hearing is not had in accordance with statutory and constitutional requirements.

The Secretary made his decision on the basis of his own personal consideration and appraisal of the evidence and argument. The transcript of record was in his possession and, while he did not read it consecutively or in full, he p. 11consulted it wherever in his judgment such consultation was necessary. As a guide to his examination of the record he studied the arguments of appellants directed to the evidence and compared them with the voluminous findings of fact, which constituted a summary and analysis of the evidence. Having read and considered the tentative findings of fact and the arguments of appellants, he made an investigation into the record—assisted by consultation with members of the Department—for the purpose of considering and appraising the evidence upon which the findings were made. Uncontradicted testimony establishes that the Secretary, in the exercise of his independent judgment, altered three of the most important items in the tentative schedule of rates. With respect to all the numerous questions raised by appellants, persuasive evidence exists to show independent inquiry and the exercise of independent judgment by the Secretary. By asserting that the Secretary did not give them a fair hearing, appellants have assumed the burden of proving by clear and convincing evidence that the Secretary did not consider their arguments or the evidence to which those arguments related.

Appellants attempt to distinguish this present situation from one in which a court adopts findings prepared by counsel on the ground that a court affords opposing p. 13counsel an opportunity to submit findings of his own or to except to the findings which are adopted. There is no force in this distinction. Although the appellants were not given an opportunity to except to the tentative findings of fact, they had an unrestricted opportunity to submit findings of their own to the Secretary of Agriculture which he could have considered. They did not take advantage of that opportunity; but that is not a circumstance which can be held against the Secretary of Agriculture. There is no logic in appellants’ suggestion that the adoption of findings is done independently if opposing counsel has a chance to criticize those findings, but must be presumed not to have been done independently if the opportunity to criticize is not afforded.

The case comes here for the second time. On the former appeal we met, at the threshold of the controversy, the contention that the plaintiffs had not been accorded the hearing which the statute made a prerequisite to a valid order. The District Court had struck from plaintiffs’ bills the allegations that the Secretary had made the order p. 14without having heard or read the evidence and without having heard or considered the arguments submitted, and that his sole information with respect to the proceeding was derived from consultation with employees in the Department of Agriculture. We held that it was error to strike these allegations, that the defendant should be required to answer them, and that the question whether plaintiffs had a proper hearing should be determined. Morgan v. United States, 298 U. S. 468.

The first question goes to the very foundation of the action of administrative agencies entrusted by the Congress with broad control over activities which in their detail cannot be dealt with directly by the legislature. The vast expansion of this field of administrative regulation in response to the pressure of social needs is made possible under our system by adherence to the basic principles that the legislature shall appropriately determine the standards of administrative action and that in administrative proceedings of a quasi-judicial character the liberty and property of the citizen shall be protected by the p. 15rudimentary requirements of fair play. These demand “a fair and open hearing,”—essential alike to the legal validity of the administrative regulation and to the maintenance of public confidence in the value and soundness of this important governmental process. Such a hearing has been described as an “inexorable safeguard.” St. Joseph Stock Yards Co. v. United States, 298 U. S. 38, 73; Ohio Bell Telephone Co. v. Public Utilities Commission, 301 U. S. 292, 304, 305; Railroad Commission of California v. Pacific Gas & Electric Co., 302 U. S. 388, 393; Morgan n . United States, supra. And in equipping the Secretary of Agriculture with extraordinary powers under the Packers and Stockyards Act, the Congress explicitly recognized and emphasized this requirement by making his action depend upon a “full hearing.” § 310?

In the record now before us the controlling facts stand out clearly. The original administrative proceeding was begun on April 7, 1930, when the Secretary of Agriculture issued an order of inquiry and notice of hearing with p. 16respect to the reasonableness of the charges of appellants for stockyards services at Kansas City. The taking of evidence before an examiner of the Department was begun on December 3, 1930, and continued until February 10, 1931. The Government and appellants were represented by counsel and voluminous testimony and exhibits were introduced. In March, 1931, oral argument was had before the Acting Secretary of Agriculture and appellants submitted a brief. On May 18, 1932, the Secretary issued his findings and an order prescribing maximum rates. In view of changed economic conditions, the Secretary vacated that order and granted a rehearing. That was begun on October 6, 1932, and the taking of evidence was concluded on November 16, 1932. The evidence received at the first hearing was re-submitted and this was supplemented by additional testimony and exhibits. On March 24, 1933, oral argument was had before Rexford G. Tugwell as Acting Secretary.

Findings were prepared in the Bureau of Animal Industry, Department of Agriculture, whose representatives had conducted the proceedings for the Government, and were submitted to the Secretary, who signed them, with a few p. 17changes in the rates, when his order was made on June 14, 1933. These findings, 180 in number, were elaborate. They dealt with the practices and facilities at the Kansas City livestock market, the character of appellants’ business and services, their rates and the volume of their transactions, their gross revenues, their methods in getting and maintaining business, their joint activities, the economic changes since the year 1929, the principles which governed the determination of reasonable commission rates, the classification of cost items, the reasonable unit costs plus a reasonable amount of profits to be covered into reasonable commission rates, the reasonable amounts to be included for salesmanship, yarding salaries and expenses, office salaries and expenses, business getting and maintaining expenses, administrative and general expenses, insurance, interest on capital, and profits, together with summary and the establishment of the rate structure. Upon the basis of the reasonable costs as thus determined, the Secretary found that appellants’ schedules of rates were unreasonable and unjustly discriminatory and fixed the maximum schedules of the just and reasonable rates thereafter to be charged.

In the light of this testimony there is no occasion to discuss the extent to which the Secretary examined the evidence, and we agree with the Government’s contention that it was not the function of the court to probe the mental processes of the Secretary in reaching his conclusions if he gave the hearing which the law required. The Secretary read the summary presented by appellants’ briefs and he conferred with his subordinates who had sifted and analyzed the evidence. We assume that the Secretary sufficiently understood its purport. But a “full hearing”—a fair and open hearing—requires more than that. The right to a hearing embraces not only the right to present evidence but also a reasonable opportunity to know the claims of the opposing party and to meet them. The right to submit argument implies that opportunity; otherwise the right may be but a barren one. Those who are brought into contest with the Government in a quasi-judicial proceeding aimed at the control of their activities are entitled to be fairly advised of what the Government p. 19proposes and to be heard upon its proposals before it issues its final command.

Congress, in requiring a “full hearing,” had regard to judicial standards,—not in any technical sense but with respect to those fundamental requirements of fairness which are of the essence of due process in a proceeding of a judicial nature. If in an equity cause, a special master p. 20or the trial judge permitted the plaintiff’s attorney to formulate the findings upon the evidence, conferred ex parte with the plaintiff’s attorney regarding them, and then adopted his proposals without affording an opportunity to his opponent to know their contents and present objections, there would be no hesitation in setting aside the report or decree as having been made without a fair hearing. The requirements of fairness are not exhausted in the taking or consideration of evidence but extend to the concluding parts of the procedure as well as to the beginning and intermediate steps.

The answer that the proceeding before the Secretary was not of an adversary character, as it was not upon complaint but was initiated as a general inquiry, is futile. It has regard to the mere form of the proceeding and ignores realities. In all substantial respects, the Government acting through the Bureau of Animal Industry of the Department was prosecuting the proceeding against the owners of the market agencies. The proceeding had all the essential elements of contested litigation, with the Government and its counsel on the one side and the appellants and their counsel on the other. It is idle to say that this was not a proceeding in reality against the appellants when the very existence of their agencies was put in jeopardy. Upon the rates for their services the owners depended for their livelihood, and the proceeding attacked them at a vital spot. This is well shown by the fact that, on the merits, appellants are here contending that under the Secretary’s order many of these agencies, although not found to be inefficient or wasteful, will be left with deficits instead of reasonable compensation for their services and will be compelled to go out of business. And to this the Government responds that if as a result of the prescribed rates some agencies may be unable to p. 21continue, because through existing competition there are too many, that fact will not invalidate the order. While we are not now dealing with the merits, the breadth of the Secretary’s discretion under our rulings applicable to such a proceeding (Tagg Bros. & Moorhead v. United States, 280 U. S. 420; Acker v. United States, 298 U. S. 426) places in a strong light the necessity of maintaining the essentials of a full and fair hearing, with the right of the appellants to have a reasonable opportunity to know the claims advanced against them as shown by the findings proposed by the Bureau of Animal Industry.

The Government adverts to an observation in our former opinion that, while it was good practice—which we approved—to have the examiner, receiving the evidence in such a case, prepare a report as a basis for exceptions and argument, we could not say that that particular type of procedure was essential to the validity of the proceeding. That is true, for, as we said, what the statute requires “relates to substance and not form.” Conceivably, the Secretary, in a case the narrow limits of which made such a procedure practicable, might himself hear p. 22the evidence and the contentions of both parties and make his findings upon the spot. Again, the evidence being in, the Secretary might receive the proposed findings of both parties, each being notified of the proposals of the other, hear argument thereon and make his own findings. But what would not be essential to the adequacy of the hearing if the Secretary himself makes the findings is not a criterion for a case in which the Secretary accepts and makes as his own the findings which have been prepared by the active prosecutors for the Government, after an ex parte discussion with them and without according any reasonable opportunity to the respondents in the proceeding to know the claims thus presented and to contest them. That is more than an irregularity in practice; it is a vital defect.

The statement made in the petition for rehearing that the present decision is contrary to the law of the case as declared in our first opinion is wholly unfounded. Our decision was not rested upon the absence of an examiner’s report. So far from departing from our former opinion, p. 251 On Petition for Rehearing.

Even if it were an ordinary lawsuit, as we understand it, there is no higher act of sovereignty than for the sovereign voluntarily to submit itself to the judgment of a p. 3127 Argument of Mr. Sumners.

The creditors in those cases stood without a practicable remedy. There is usually no property of a district subject to execution. Taxpayers are not personally liable. Mandamus to lay taxes is futile, because it results only in assessments that are defaulted. Tax sales drive down the value of property, and add further tax delinquencies. The experience of those creditors—who were themselves largely instrumental in the pressure which brought about the enactment of these Acts—the experience of those creditors was that they were without practicable remedies. This was because, though the only possible remedy was a remedy by agreement, it was almost always subject to defeat. Even though a great majority of the creditors agreed with the district on a practical course to restore some value to the defaulted bonds and to rehabilitate the district so that it could go on and exercise its public functions, any creditor who had a high estimate of the nuisance value of his particular security was in a p. 35position to block the settlement, which required unanimous action.

Now, there is an effort in the brief of our adversary to compare this power with the taxing power, and to hold that because there are certain immunities to the State and to state agencies under the taxing power, a similar immunity must be written into the bankruptcy power. That argument starts by asserting the theory that the bankruptcy power is found in the same subsection of the Constitution as the grant of the taxing power. So are the powers to regulate interstate commerce, and to punish counterfeiters. The taxing and bankruptcy powers are not parallel powers; and no argument based on the one can be applied to the other. The power of the Federal Government to tax is subject to qualification, and the bankruptcy power is not. The power to tax is to provide for the common defense and the general welfare, and hence it may very well be that where you have a plan of which the tax is a part, such as this Court held the Agricultural Adjustment Act to be, or the Child Labor Act, then you are led to an inquiry as to whether the taxing plan itself is local or is general, is national or p. 37is within powers reserved to localities. The very nature of the taxing power, as it exists in the Federal Government, may demand that inquiry; but there is no such qualification in the bankruptcy clause. That requires only uniformity.

Mr. Knupp for the Irrigation District explained the character of the District, the history and extent of its p. 39indebtedness 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.

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 p. 41adjudication 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.

By leave of Court, briefs of amici curiae were filed by Messrs. U. S. Webb, Attorney General of California, Greek L. Rice, Attorney General of Mississippi, Ray McKittrick, Attorney General of Missouri, Gray Mashburn, Attorney General of Nevada, Frank H. Patton, Attorney General of New Mexico, I. H. Van Winkle, Attorney General of Oregon, and Ray E. Lee, Attorney p. 45General of Wyoming, on behalf of those States; Messrs. G. W. Hamilton, Attorney General of Washington, and Fred J. Cunningham, on behalf of the State of Washington; and Messrs. Jack Holt, Attorney General of Arkansas, and Chas. D. Frierson, on behalf of the State of Arkansas and certain drainage districts thereof, all in support of appellant in No. 772; by Messrs. Cary D. Landis, Attorney General of Florida, and Giles J. Patterson, on behalf of the State of Florida, in support of appellant in No. 757; and by Messrs. Francis V. Keesling and Charles L. Childers, on behalf of the West Coast Life Ins. Co., in support of appellees.

Appellant, the Lindsay-Strathmore Irrigation District, was or<’ A nized in the year 1915 under the California Irrigation District Act of March 31, 1897 (Cal. Stat. 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 p. 46agricultural 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 per cent, 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 per cent, 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 four per cent.

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 p. 47the amounts due the complaining creditors, and that the proceedings in that court had been suspended pending the proceeding in the bankruptcy court.

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., p. 48ch. 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:

While the facts thus stated related to conditions in California, similar conditions existed in other parts of the p. 49country and it was this serious situation which led the Congress to enact Chapter IX and later Chapter X.1

In Ashton v. Cameron County District, supra, the court considered that the provisions of Chapter IX authorizing p. 50the 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.”

“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 p. 51that H. R. 5969 is not invalid or contrary to the reasoning of the majority opinion. . . .

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 p. 52essence 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, 353; Steward Machine Co. v. Davis, 301 U. S. 548, 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. I, § 10, subd. 3. Poole v. Fleeger, 11 Pet. 185, 209; Rhode Island v. Massachusetts, 12 Pet. 657, 725; Hinderlider v. La Plata River Co., post, p. 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, 137; New Jersey v. Wilson, 7 Cranch 164; Dartmouth College v. Woodward, 4 Wheat. 518, 643, 644; Charles River Bridge v. Warren Bridge, 11 Pet. 420, 549; Jefferson Branch Bank v. Skelly, 1 Black 436, 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, 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.

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 p. 54taxation 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.