Arkansas v. Creditors

The "protection"' of bondholders is a big phrase in Depression. "Protective committees" are formed, they solicit holders of defaulted bonds to deposit their securities, they try by protest and lawsuit to collect--the expenses of the effort being charged against the bond owners. So many protective committees exist today that they have been called "the bellyaching racket." Even the proposed U. S. securities bill would create a corporation to protect U. S. holders of foreign bonds. And a committee was announced last week in London, to be headed by popular Sir Harry Armstrong, who retired in 1931 as British Consul-General at Manhattan, to protect British holders of U. S. securities (because of suspension of the gold standard).

Even more remarkable was a protective committee formed last week with the following in its personnel: a vice president of Metropolitan Life Insurance Co., the treasurer of New York Life, vice presidents of John Hancock and Equitable, a representative of Halsey, Stuart & Co.. the president of Manhattan's Union Dime Savings Bank.

Equally noteworthy was the debtor against whom this committee will take action: the sovereign State of Arkansas.

Not within the memory of many investors now living has a committee been formed to protect the holders of the bonds of any one State. Noteworthy too is the cause of the action, not to collect as much as possible from one who is bankrupt but to collect from a debtor who in the view of the bondholders is deliberately welshing on the terms of his promise to pay.

Under an act of 1927 Arkansas issued $91,500,000 of highway and toll bridge bonds bearing 4% to 44% interest and secured by a first claim on the State's collection of gasoline, oil and automobile taxes. The State's revenue from these sources has averaged over $9,000,000 a year, was $7,395,000 even in 1932. After devoting about $4,000,000 a year to debt service on these bonds there was still a considerable sum left over which the State gave to its road districts to help them pay off bonds they had issued.

Last January, however, a new Governor took charge of Arkansas. He is Judge Junius Marion Futrell, Democrat, who was born on an Arkansas farm, who walked daily over Arkansas' country roads to get his schooling. Once back in 1913 he, as president pro tem of the State Senate, was acting Governor of Arkansas for a few months and during that time made a record for himself: inaugurated the first State system of roads, pardoned a minimum number of jailbirds, helped out sufferers from the big flood that year. Since then he has been a judge, a member of the Legislature. Once he owned stock in a bank but it failed and he was assessed; since then he has owned no stock. When he was elected Governor last fall he still had no electric lights in his house. During the campaign he pledged himself to reduce State expenses 50%, to cut Arkansas' heavy per capita debt of $57 (one of the largest of any State).

When he got into office he looked over State finances and decided that the gasoline tax and automobile license fees would not be devoted first to the highway bonds, decided to spread them to cover also the cost of service on $47,000,000 of road district bonds and the cost of highway maintenance. For all three purposes he needed

$10,000,000 and figured that, after reducing the high automobile license fee, the State would have only $6,500,000 of gasoline and license revenue. So first he defaulted interest on the highway bonds, then got the Legislature to offer holders in exchange new 25-year bonds bearing only 3% interest.

The bondholders did not have to exchange their old bonds for new, but the State would pay no interest on the old bonds. They rushed to Governor Futrell protesting that the State's action was a deliberate breach of contract, since gasoline and license taxes were still adequate to take care of the original bonds they had bought. Said he briefly:

"Arkansas has been oversold through a wrecking crew with the assistance of the bond buyers, despite their knowledge that the State highway issues were excessive. . . ."

Last week goaded by the complaints of bondholders he reiterated: "My position is that all highway obligations viewed from a moral viewpoint are coequal. This is true because all State highways belong to the Commonwealth regardless of the method used to pay for their construction."

Many were financiers' conjectures last week as to what the distinguished bondholders' protective committee could accomplish. If a municipality defaults on its bonds, it can be sued in court and, after a judgment is given, a writ can be obtained compelling the municipality to collect necessary taxes and pay its obligations. But under the U. S. Constitution no private person can sue a State without its consent. In this case however it happens that the States of Pennsylvania, Nevada and Connecticut hold Arkansas highway bonds in various State trust funds, and as States they can sue.

One famed suit of this kind was instituted by Virginia against West Virginia (arising out of the split-off of West Virginia during the Civil War). In 1918 the Supreme Court decided that case in favor of Virginia. West Virginia paid the disputed debt. But no machinery exists for forcing a State to pay.

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