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U.S. Supreme Court

Case v. Los Angeles Lumber Products Co., Ltd., 308 U.S. 106 (1939)

Case v. Los Angeles Lumber Products Co., Ltd.

Nos. 23 and 24

Argued October 18, 1939

Decided November 6, 1939

308 U.S. 106


1. The question whether a plan of reorganization is "fair and equitable" within the meaning of § 77B of the Bankruptcy Act is a question of law. P. 308 U. S. 114.

2. Where a plan of reorganization is not fair and equitable as a matter of law, it cannot be approved by the court even though the percentage of the various classes of security holders required by § 77B(f) for confirmation of a plan has consented. Id.

3. The fact that a great majority of the security holders have approved the plan is not the test of whether the plan is a fair and equitable one. Id.

4. Under § 77B of the Bankruptcy Act, as in equity reorganizations, the court must use its own informed and independent judgment in every important determination in the administration of the proceedings. P. 308 U. S. 115.

5. Where words are employed in an Act which had at the time a well known meaning in the law, they are used in that sense unless the context requires the contrary. Id.

6. It is a fixed principle, governing under § 77B of the Bankruptcy Act as well as in equity reorganizations, that, to the extent of their

Page 308 U. S. 107

debts, creditors are entitled to absolute priority over stockholders against all the property of an insolvent corporation, relative priority not being sufficient. P. 308 U. S. 115.

7. To accord the creditor his full or absolute priority against the corporate assets where the debtor is insolvent, the stockholder's participation must be based on a contribution in money or in money's worth, reasonably equivalent to the participation accorded the stockholder. Pp. 308 U. S. 115-122.

8. The amount owed bondholders by an insolvent corporation was more than four-fold the value of its assets. A plan of reorganization under § 77B of the Bankruptcy Act gave to the old stockholders 23 percent of the assets and voting power in a new company without requiring of them any fresh contribution of capital, held not "fair and reasonable." P. 308 U. S. 122.

Such participation by the old stockholders cannot be justified:

(1) upon the ground that some of them possess a financial standing and influence and can provide a continuity of management beneficial to the bondholders (p. 308 U. S. 122); or

(2) upon the ground that, if the bondholders were to foreclose presently, they would receive substantially less than the appraised assets (p. 308 U. S. 123); or

(3) upon the ground that the virtual abrogation by the Plan of an earlier agreement deferring foreclosure gave to the bondholders a valuable consideration justifying participation by the stockholders in the reorganization (p. 308 U. S. 124); or

(4) upon the ground that the bondholders will be aided by maintaining the debtor as a going concern and avoiding litigation with the old stockholders. P. 308 U. S. 129.

9. An insolvent corporation, by invoking the jurisdiction of the District Court under § 77B of the Bankruptcy Act, necessarily waives its right to remain in unmolested dominion and control over the corporate property, and consequently a purported surrender, in its plan of reorganization, of its right, under an earlier agreement, to postpone the date when the mortgage securing its bonds could be foreclosed, furnishes no consideration for participation by stockholders of the corporation in the assets and management of the new one to be formed. P. 308 U. S. 124.

10. In determining whether a plan of reorganization presented by an insolvent corporation under § 77B of the Bankruptcy Act is "fair and equitable" to minority bondholders, the fact that it was previously agreed to by the requisite majorities of security holders does not give it the force of a contract binding on the court. P. 308 U. S. 125.

Page 308 U. S. 108

11. In proceedings under § 77B of the Bankruptcy Act, compromise of claims is allowable in fitting circumstances, but the District Court is not to be influenced to approve or disapprove a plan of reorganization by threats of litigation on the part of stockholders. P. 308 U. S. 129.

12. The criteria for exclusion or inclusion of old stockholders in a reorganization under § 77B are the same whether the petition be voluntary or involuntary. P. 308 U. S. 131.

13. Failure to accept a plan proposed does not force dismissal or liquidation. Under § 77B(c)(8), the District Court may allow time for proposal of a new plan where it does not appear that one which is fair and equitable and in accordance with the Act cannot be adopted, nor that all reasonable time for proposal of such alternative plan has expired. P. 308 U. S. 131.

100 F.2d 963, reversed.

Certiorari, 307 U.S. 619, to review the affirmance of decrees of the District Court confirming a corporate debtor's amended plan of reorganization under § 77B of the Bankruptcy Act. 27 F.Supp. 501.

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