Apparently, the said account submitted by the district includes not only expenditures incurred as a result of the proposed project but also ordinary expenditures. Your committee believe the bill should specify that payment may be made only for expenditures incurred as a result of the proposed construction of the reclamation project.

The Acting Secretary of the Interior recommends that proper adjustments with the holders of notes and warrants be made from funds under control of the Public Works Administration, since the expenditures were incurred by the district in the expectation of a Public Works Administration allotment for construction of the project.

The final clause of the bill, as suggested by the Acting Secretary, provides that the Administrator shall not pay more than the reasonable value of the notes and warrants. Presumably, the intention was to provide that the Administrator shall not pay more than the reasonable value of services performed and materials furnished for which the notes and warrants were given.

As amended, your committee recommend the passage of the bill.

The following communications are appended hereto and made a part of this report:

Hon. JOSIAH W. BAILEY,

DEPARTMENT OF THE INTERIOR,
Washington, December 31, 1937.

Chairman, Committee on Claims, United States Senate.

MY DEAR SENATOR BAILEY: I have received your letter of August 24, enclosing for my report a copy of S. 3002 for the relief of holders of certain unpaid notes and warrants of the Verde River Irrigation and Power District, organized under the laws of Arizona.

On November 2, 1933, an allotment of $4,000,000 was made under title II of the act of June 16, 1933 (48 Stat. 2103), for the construction of the Verde reclamation project in Arizona, for the irrigation of lands in the Verde River Irrigation and Power District. Before work was started a careful investigation of the project showed it to be economically infeasible on account of the high per-acre cost, estimated to be $472. The unexpended and unobligated portion of the allocation was canceled October 3, 1934. During the period while the allotment was outstanding the district incurred considerable expense in connection with the project and issued warrants and notes to meet its obligations for such expense. The warrant and note holders have not been paid, and it is believed that under the circumstances it would be proper for Congress to authorize a settlement with such warrant and note holders to the maximum of $56,000 as proposed in the bill. This is understood to be the face value of the unpaid warrants and notes issued by the district during the period while the Federal allotment for the Verde project was outstanding.

At the time the allocation of funds was made for the construction of the Verde project, there was considerable doubt regarding the legal power of the Verde River Irrigation and Power District to enter into a contract with the United States for the construction by the United States of the project. The district had outstanding contracts with other parties by which the other parties were authorized to construct the project. There is enclosed a letter of January 3, 1934, from the Solicitor of the Department to the Commissioner of the Bureau of Reclamation, which gives in more detail the legal obstacles which existed to the immediate undertaking of the project by the United States. It will be noted that the next to the last paragraph of this letter, which was approved by the Secretary of the Interior and the Administrator of Public Works, reads as follows:

"When the contract between the United States and the Verde Irrigation and Power District is negotiated it should contain a provision that the district will prosecute to final judgment suits on both the Koerner and Foley Bros. contracts, and it might be advisable to suggest to the district that early institution of the suits even before the contract is made might permit the earlier expenditure of large sums of money by the United States on the construction of the dam and irrigation works."

The district, as suggested by the Department, undertook to clear away these legal obstacles before a contract was executed with the United States and filed a declaratory judgment action in the Superior Court of Maricopa County against the Foley brothers, Foley Bros., Inc., and D. A. Foley & Co. Another similar suit was filed in the same court against E. J. Koerner, H. A. Hood, Alva E. Harshman, and H. P. Moran, March 31, 1934. The defendants endeavored to have the suit removed to the Federal court, but were unsuccessful, and judgment was given for the district. Alva E. Harshman and H. P. Moran, assignees of Koerner, were represented at the hearing. They filed an action March 29, 1934,

in the United States District Court for Arizona, entitled "A complaint in equity to impress a lien on bond and to have a trust declared." On May 11, 1934, the State court in the Foley Bros. case, which was tried during the first, second, and third days of May 1934, handed down a decision in favor of the district. The Federal court case against the district was still pending when the allocation for the project was canceled.

The district incurred, it will be noted, considerable legal expense at the suggestion of the United States. It is believed that these and similar expenses which were incurred by the district in the belief that the project would be constructed, and which would not have been incurred if the construction of the project was not believed to be assured, might properly be paid by the United States. There is enclosed a statement furnished by Senator Hayden, giving a list of the warrants issued by the district between November 3, 1933, and October 2, 1934. Many of the warrants were doubtless issued to meet the ordinary expenses of the district, and the holders of such warrants could not be paid under S. 3002, if enacted.

Under the circumstances, it is believed that proper adjustments with the holders of notes and warrants should be authorized by Congress. However, it is regarded as appropriate that the adjustments should be made by the use of funds under the control of the Public Works Administration, since the expenditures were incurred by the district in the expectation of being able to utilize Public Works funds for the construction of the Verde reclamation project.

To authorize settlement by the use of Public Works funds, it is suggested that the following be substituted for S. 3002:

"A BILL For the Relief of the Verde River Irrigation and Power District, Arizona

"Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Federal Emergency Administrator of Public Works is hereby authorized to pay, out of any unexpended fund under his control, not to exceed $46,024.41 in making settlements with the holders of the unpaid notes and warrants of the Verde River Irrigation and Power District issued in payment for property, services or supplies furnished, in furtherance of the Verde Reclamation Project, Arizona, to the District during the period from November 2, 1933, when an allotment of $4,000,000 for the construction of the Verde project was authorized by the said Administrator, to October 3, 1934, when said allotment was canceled: Provided further, That in making settlements with the holders of such notes or warrants the Administrator shall pay not to exceed the reasonable value thereof as determined by him and where such notes or warrants have been transferred by the original holders, the price or prices paid by the transferees shall be considered by the Administrator in arriving at a determination of such reasonable value."

The

With the foregoing change, the enactment of the bill is recommended. Bureau of the Budget advises that the enactment of the bill, if amended as above, would not be in conflict with the financial program of the President.

Sincerely yours,

CHARLES WEST, Acting Secretary of the Interior.

DEPARTMENT OF THE INTERIOR,
OFFICE OF THE SOLICITOR,
Washington, January 3, 1934.

The COMMISSIONER OF THE BUREAU OF RECLAMATION.

MY DEAR MR. COMMISSIONER: You have submitted to me in a memorandum of December 19, 1933, certain questions involved in construction of the Verde project in Arizona due to previous contracts made by the Verde Irrigation and Power District for construction of power and irrigation works. The Verde Irrigation and Power District is a municipal corporation organized under the laws of the State of Arizona, and comprises within its borders all of the irrigable land of the Verde project. It is assumed that the district was organized pursuant to section 3324 of the Revised Code of Arizona, 1928. Papers in connection with the organization of the district are not before me and therefore a definite conclusion cannot be reached on this point.

On May 6, 1924, after the district was organized, it made a contract with E. J. Koerner, of Los Angeles, Calif., which recites that the district had voted bonds in the amount of $23,000,000 to use in construction of works described in the notice of election. The contractor agreed to construct the works and the district agreed to pay it $23,000,000 in the bonds of the district at their par or face value for the completed construction program.

A schedule for making payment is set out in the contract, but in article 15 it is provided that the bonds of the district are to be available within 30 days after the approval of a surety bond to be given by the contractor conditioned upon the faithful performance of the contract. Article 13 of the contract provides that the contractor will, within 30 days from the signing of the contract, execute to the district such a surety bond in the sum of $5,750,000. And in article 14 it is agreed that the contract shall not have any effect until such contractor's bond has been filed and approved. By article 5 the contractor is required to start construction within 90 days after the approval of his bond. It is to be noted that the date of approval of the contractor's bond is not only the effective date of the contract, but is also the date from which the time for performance of the other obligations of the contract is computed. Whether that bond was ever delivered and approved does not appear definitely from the papers before me. However, there is reason to believe that it was not, and has not been delivered by the contractor. If that is the case, it is my opinion that the contract originally made with E. J. Koerner has never become effective.

Certain attorneys in Phoenix, Ariz., and Los Angeles, Calif., have rendered memorandum opinions on the validity of this contract at the request of Alva E. Harshman, the assignee of this Koerner contract. They concluded that the 6-year statute of limitations had not run because the permission of the Department of the Interior had not been obtained to the construction of the Verde project, and that it was thus impossible to perform under the contract even to the extent of furnishing the contractor's bond. I find nothing in the papers to indicate any reasonable effort to secure such permission from the Department. On the contrary, the implication is that the contract was merely allowed to lie dormant. Under such circumstances, it is my opinion that the contractor has no legal justification for his apparent failure to furnish bond, and that the contract has thus not come into existence. It is also my opinion, resulting from the apparent lack of effort to perform under the contract that the 6-year statute of limitations is a bar even though the contract be deemed to have been originally effective. In addition, it is apparent, from the portions of the contract above referred to, that time was deemed to be vital in the performance of the contract. I feel certain that no court would find such a contract to be effective after 10 years of inactivity. On October 10 and 16, 1923, contracts were made between the district and D. A. Foley & Co., of St. Paul, Minn., for the construction of the district's entire irrigation system at a cost estimated at $23,000,000. The contracts were canceled under an agreement made May 23, 1933, between the district and Foley Bros., Inc., which agreement made further provision for the construction by Foley Bros. of the Verde Dam only at a cost of $3,500,000, the contract price to be the actual cost of construction plus a fee of not less than $300,000. At the time this contract was made the district had in anticipation the securing of funds from the Reconstruction Finance Corporation to finance the work. It failed to obtain the money and nothing has been accomplished under the contract. With this outstanding situation, the Administrator of Public Works allotted funds for the construction of the Verde project, the work to be done by the Bureau of Reclamation and repayment to be made by the district in accordance with the reclamation law. The allotment did not make available to the district any money to carry out the contract which it had made as above described. The district will not obtain any money from the Federal Government under the allotment made by the Administrator of Public Works, but the money allotted will be expended by the Bureau of Reclamation for construction purposes, with an agreement made by the district that it will repay the money in accordance with the reclamation law, that is, over a term of not more than 40 years without interest.

In paragraph 48 of the contract with Foley Bros. it is provided that, if the Reconstruction Finance Corporation or other governmental agency which may purchase the bonds of the District or otherwise finance its works shall require revision of the contract, then the parties shall revise and, in the event of failure to agree on a revision, the contract shall stand canceled. It is my opinion that the contract embodies an implied condition that it may operate only insofar as permissible under the orders of any governmental agency financing the project, and that the contract shall stand canceled on any inability to conform to such orders. The governmental agency (the Public Works Administration) has insisted upon conditions which leave no room at all for the operation of the contract even though revised. Under such conditions I believe that the contract is not now effective.

The original contract with D. A. Foley & Co. was canceled in consideration of the recent Foley Bros. contract. However, it is my opinion that the failure of the subsequent contract will not revive the former, inasmuch as there is no indication of such an intention, but there is actually an indication of a contrary intention arising from the fact that failure of the subsequent contract was contemplated (under the clause discussed above) with no suggestion of revival of the former contract.

Should suit be brought by the holders of any of the above contracts and should the courts render judgments against the district, the judgments would be collecible pursuant to sections 3356 to 3361 of the Revised Code of Arizona, 1928. Under those sections the board of directors of the district are required to make estimates each year to meet the obligations of the district for the next fiscal year and to certify the amount to the board of supervisors of the county as a basis for the levy and collection of taxes. Section 3361 provides:

"SEC. 3361. SUPERVISORS to act on FAILURE OF BOARD.-Should the board of directors neglect, fail, or refuse to provide the estimates and certificates as the basis for levy and collection of taxes, at any time, the board of supervisors shall make such levy in such amount as they may deem sufficient for the purpose of the district for any fiscal year. Such board of supervisors, upon the request of any person holding any fully matured unpaid and undisputed evidence of district indebtedness, shall make such levy of taxes upon the taxable property of the district as will provide for the payment of such indebtedness of the district held by such person and such other indebtedness as shown by such person to exist, and levies so made shall be collected and enforced in the same manner as regular assessments and tax levies for district purposes."

The last sentence of this section authorizes the county supervisors to levy for the purpose of paying any undisputed evidence of indebtedness and a judgment would fall in that class:

"Persons interested or affected may have declaration. Any person interested under a deed, will, written contract, or other writing or whose rights, status or other legal relations are affected by a statute, municipal ordinance, contract or franchise, may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status or other legal relations thereunder. A contract may

be construed either before or after there has been a breach thereof."

By means of this section and related law the rights of the parties could be determined.

When the contract between the United States and the Verde Irrigation and Power District is negotiated it should contain a provision that the district will prosecute to final judgment suits on both the Koerner and Foley Bros., contracts, and it might be advisable to suggest to the district that early institution of the suits even before the contract is made might permit the earlier expenditure of large sums of money by the United States on the construction of the dam and irrigation works.

The danger encountered by the Bureau of Reclamation in proceeding with the work arises from the possibility of a large recovery under the outstanding contracts and the attempt to enforce collection under the State law. The statute seems to authorize, or possibly compel, the levying of an assessment sufficiently large to liquidate the judgment or judgments in 1 year. This might confiscate all of the property in the district before the Government had succeeded in constructing irrigation works for the delivery of water to district lands. Although it is my opinion from the papers now before me that the contracts are inoperative a court might take the contrary view, for there is no certainty as to the conclusions on these instruments.

There is no method whereby these contracts can be eliminated except by agreement or by separate suits instituted by the Verde Irrigation and Power District against the contractors for the purpose of securing declaratory judgments as provided in section 4386, Revised Code of Arizona, 1928, which is quoted for convenience:

Work for the unemployed is an urgent necessity in Arizona, and I believe that the Bureau is justified in proceeding with necessary surveys, plans, and investigations and in the development of designs for the dam and specifications for letting contracts, both for the dam and irrigation system, but no construction contracts involving large sums should be executed until satisfactory disposition has been made of the claims now being urged by the claimants under the Koerner and

Foley Brothers contracts.

There is sufficient reason to believe that recovery cannot be had on either contract to justify the continuance of preparatory work and expenditure. The negotiation of the contract with the district should proceed with alacrity.

Very truly yours,

Approved January 3, 1934.

NATHAN R. MARGOLD, Solicitor.

HAROLD L. ICKES,

Administrator of Public Works and Secretary of the Interior.

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