In the 1935 case of Ashton et al. v. Cameron County Water Improvement District No. One, a group of bondholders sued the water district over its decision to issue new bonds without providing for payment on previously issued ones that were in default. The plaintiffs argued this violated their rights under the Fourteenth Amendment's due process and equal protection clauses as well as impaired their contract with the district under Article I, Section 10 of the Constitution. The Supreme Court ruled against them, stating that political subdivisions like counties or municipalities do not have inherent sovereignty and thus cannot violate constitutional provisions designed to protect citizens from state action. It further held that these entities are merely "convenient agencies" for exercising such portions of state power as may be entrusted to them in their absolute discretion. This ruling clarified that while states themselves could not impair contractual obligations (including those related to bonds), subdivisions like water districts could - provided they had been given legislative authority by the state itself.

In the dissenting opinion for Ashton et al. v. Cameron County Water Improvement District No. One, Justice Stone argued that the majority's decision was inconsistent with previous rulings and principles of constitutional law regarding bankruptcy proceedings. He contended that a state entity should not be exempt from federal bankruptcy laws simply because it is a political subdivision of the state, as this would undermine Congress' power to establish uniform bankruptcy laws throughout the country. Furthermore, he disagreed with the majority's interpretation of what constitutes 'property' under these laws, arguing that it should include any interest in property which can be transferred or assigned by creditors - including bonds issued by public entities like water districts - rather than being limited to physical assets only.