William O. Douglas

“ II. The Circuit Court of Appeals held that the absolute priority rule of Northern Pacific Railway Co. v. Boyd, supra, and Case v. Los Angeles Lumber Products Co., supra, applied to reorganizations of solvent as well as insolvent companies. That is true. Whether a company is solvent or insolvent in either the equity or the bankruptcy sense, 'any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights' of creditors 'comes within judicial denunciation'. ”

“ If the creditors are adequately compensated for the loss of their prior claims, it is not material out of what assets they are paid. So long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis, the requirements of 'fair and equitable' are satisfied.
Any other standard might well place insuperable obstacles in the way of feasible plans of reorganization. ”

“ The status of the Union and Consumers bondholders emphasizes its necessity and importance. According to the District Court the mortgaged assets are insufficient to pay the mortgage debt. There is no finding, however, as to the extent of the deficiency or the amount of unmortgaged assets and their value. It is plain that the bondholders would have, as against Consolidated and its stockholders, prior recourse against any unmortgaged assets of Union and Consumers. The full and absolute priority rule of Northern Pacific Railway Co. ”

“ They have received an inferior grade of securities, inferior in the sense that the interest rate has been reduced, a contingent return has been substituted for a fixed one, the maturities have been in part extended and in part eliminated by the substitution of preferred stock, and their former strategic position has been weakened. ”

“ The criterion of earning capacity is the essential one if the enterprise is to be freed from the heavy hand of past errors, miscalculations or disaster, and if the allocation of securities among the various claimants is to be fair and equitable. ”

“ The stock of Union and Consumers is held by Consolidated. Union has outstanding in the hands of the public [3] $1,877,000 of 6% bonds secured by an indenture on its property, with accrued and unpaid interest [4] thereon of $403,555-a total mortgage indebtedness of $2,280,555. Consumers has outstanding in the hands of the public [5] $1,137,000 of 6% bonds secured by an indenture on its property, with accrued and unpaid interest [6] thereon of $221,715-a total mortgage indebtedness of $1,358,715. ”

“ A holding company, as well as others in dominating or controlling positions (Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281) , has fiduciary duties to security holders of its system which will be strictly enforced. ”