William O. Douglas

“ In these proceedings there is no occasion for the court to yield to such pressures. If the priorities of creditors which the law protects are not to be diluted, it is the clear duty of the court to resist all such assertions. Of course, this is not to intimate that compromise of claims is not allowable under § 77B. There frequently will be situations involving conflicting claims to specific assets which may, in the discretion of the court, be more wisely settled by compromise rather than by litigation. ”

“ The criteria for exclusion or inclusion of stockholders in a plan are precisely the same in both situations. In practice it is not infrequent to find proceedings which start with a debtor's petition ending up with plans of reorganization which exclude stockholders. ”

“ To hold that in a § 77B reorganization creditors of a hopelessly insolvent debtor may be forced to share the already insufficient assets with stockholders because apart from rehabilitation under that section they would suffer a worse fate, would disregard the standards of 'fair and equitable' ”

“ Hence, we must assume, as the District Court found, that the bondholders and the trustee could not take possession of the property through foreclosure or otherwise until the maturity of the bonds. And as a corollary thereof we likewise assume that the stockholders, at least so far as the bondholders were involved, could keep their management group in possession and control until that time. ”

“ The debtor is a holding company owning all of the outstanding shares of the capital stock (except for certain qualifying shares held by directors) of six subsidiaries. Three of these have no assets of value to the debtor. Two have assets of little value. The debtor's principal asset consists of the stock of Los Angeles Shipbuilding and Drydock Corporation which is engaged in shipbuilding and ship repair work in California. This subsidiary has fixed assets of $430,000 and current assets of approximately $400,000. ”

“ Yet in spite of this finding, the court, in the orders now under review, confirmed the plan. And the court approved it despite the fact that the old stockholders, who have no equity in the assets of the enterprise, are given 23% of the assets and voting power in the new company without making any fresh contribution by way of subscription or assessment. ”

“ The Class A stockholders will receive the 188,625 shares of common stock, without the payment of any subscription or assessment. No provision is made for the old Class B stock. The aggregate par value of the total preferred and common stock to be issued to existing security holders is $830,000 an amount which equals the going concern value of the assets of the enterprise. ”

“ The conclusion of the District Court that the virtual abrogation of the agreement deferring foreclosure until 1944 ('the principal valuable consideration' given to the bondholders by the stockholders) justified participation by the stockholders in the plan is likewise erroneous. ”

“ Under that theory all classes of security holders could be perpetuated in the new company even though the assets were insufficient to pay-in new bonds or stock the amount owing senior creditors. Such a result is not tenable.
It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. This Court, as we have seen, indicated as much in Northern Pacific Railway Co. v. Boyd, supra, and Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra. ”

“ Thereafter all shares of both classes will participate equally in dividends. The preferred stock will receive on liquidation a preference to the amount of its par value. Thereupon the common will receive a similar preference. Thereafter all shares of both classes participate equally.
170,000 shares of preferred are reserved for sale to raise money for rehabilitation of the yards. [5] 641,375 shares of the preferred are to be issued to the bondholders, 250 shares to be exchanged for each $1000 bond. ”

“ The plan was assented to by approximately 92.81% of the face amount of the bonds, 99.75% of the Class A stock, and 90% of the Class B stock. Petitioners own $18,500 face amount of the bonds. They did not consent to the so-called voluntary reorganization in 1930 whereby the trust indenture was amended. And throughout the present § 77B proceedings they appropriately objected that the plan was not fair and equitable to bondholders.
The District Court found that the debtor was insolvent both in the equity sense and in the bankruptcy sense. ”

“ Central Union Trust Co., supra, that 'to the extent of their debts creditors are entitled to priority over stockholders against all the property of an insolvent corporation', for there are not sufficient assets to pay the bondholders the amount of their claims. ”

“ To that end, a supplement to this trust indenture was executed, pursuant to a provision therein, with the consent of about 97% of the face value of all the outstanding bonds, which reduced the interest from 7 1/2% to 6% and made the interest payable only if earned. ”