US SUPREME COURT DECISIONS

1. Appraisal of the property of a corporation undergoing reorganization under § 77B of the Bankruptcy Act accepted by this Court in view of concurrent findings of two courts below and substantial evidence sustaining their findings. P. 306 U. S. 314.

2. The so-called instrumentality rule is but a convenient way of designating the application, in particular circumstances, of the broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when so to do would work fraud or injustice. This principle has been applied in appropriate circumstances to give minority stockholders redress against wrongful injury to their interests by a majority stockholder. P. 306 U. S. 322.

3. A provision new in bankruptcy legislation, with respect to the standing of stockholders in corporate reorganization, is found in § 77B(b) of the Bankruptcy Act, which enacts that a plan of reorganization

"may include provisions modifying or altering the rights of stockholders generally, or any class of them, either through the issuance of new securities of any character or otherwise."

P. 306 U. S. 322.

4. Section 77B of the Bankruptcy Act authorizes the court, as a court of equity, to recognize the rights and status of the preferred stockholders of a bankrupt corporation arising out of the wrongful and injurious conduct of a controlling corporation in the mismanagement of the bankrupt's affairs. P. 306 U. S. 322.

5. A parent corporation with complete control of a subsidiary grossly mismanaged its affairs through many years, and, according to the accounts between them, became its creditor in an enormous sum. Meanwhile, the preferred stockholders of the subsidiary had no voice in its management because the charter denied them voting power so long as dividends were paid them, and because the dominant corporation caused the subsidiary, notwithstanding its precarious condition, to pay such dividends when due. In a reorganization proceeding under § 77B of the Bankruptcy Act, the District Court approved a compromise of the parent company's chanrobles.com-red

Page 306 U. S. 308

claim, and on that basis approved a plan of reorganization involving formation of a new successor corporation, discharge of other obligations, and satisfaction of the compromised claim by awarding to the parent company a large majority of the new company's common stock, thus continuing its complete control, but allowing only a minority of such stock to the old preferred stockholders.

Held:

(1) That the District Court abused its discretion in not rejecting the compromise and the plan of reorganization. Pp. 306 U. S. 309, 306 U. S. 323.

(2) If a reorganization is effected, the amount at which the parent company's claim is allowed is not important if it is to be represented by stock in the new company, provided the stock to be awarded it is subordinate to that awarded preferred stockholders of the bankrupt. P. 306 U. S. 324.

(3) No plan ought to be approved which does not accord such preferred stockholders a right of participation in the equity in the assets prior to that of the parent company, and at least equal voice with that company in the management. Id.

96 F.2d 693 reversed.

Certiorari, 305 U.S. 584, to review the affirmance of a judgment of the District Court approving a plan of reorganization under § 77B of the Bankruptcy Act.