## Facts

- The debtor was a holding company whose principal asset was stock in a shipbuilding subsidiary with fixed and current assets totaling roughly $830,000; other assets were minimal.
- The debtor’s liabilities were largely first-lien mortgage bonds totaling about $3.8 million in principal and interest; no interest had been paid since 1929.
- A prior voluntary adjustment reduced the bond interest rate and made interest payable only if earned.
- In a reorganization proceeding under Bankruptcy Act § 77B, a plan valued the enterprise at less than one-fourth of the bond debt.
- Despite insolvency, the plan gave existing shareholders a substantial stake (about 23%) in the reorganized company without requiring any new capital contribution.
- Large majorities of bondholders approved the plan, but a minority objected that the plan was not “fair and equitable.”
- The district court confirmed the plan and the court of appeals affirmed, relying in part on creditor approval and perceived benefits of avoiding foreclosure and preserving going-concern value.

## Issues

1. Whether the statutory requirement that a § 77B plan be “fair and equitable” presents a question of law for independent judicial determination.
2. Whether, when the debtor is insolvent, a plan can be “fair and equitable” if it grants old shareholders a material participation without a new contribution of capital, consistent with the absolute priority rule.

## Decision

- The Supreme Court reversed the confirmation and remanded.
- The Court held that whether a plan is “fair and equitable” under § 77B is a question of law that courts must decide independently.
- The Court held the plan was not fair and equitable because it violated the absolute priority rule by allocating value to old shareholders while senior creditors were not paid in full.
- The Court rejected reliance on creditor-majority approval as a substitute for compliance with the legal standard.
- The Court rejected asserted justifications for shareholder participation (e.g., continuity of management, avoidance of foreclosure costs, or other intangible benefits) as insufficient absent a real new contribution.

## Legal Principles

- “Fair and equitable” in § 77B incorporates the established equity reorganization meaning, including the absolute priority rule.
- In an insolvent corporate reorganization, creditors are entitled to full priority over shareholders with respect to the debtor’s property; relative priority is insufficient.
- A court may not confirm a plan that is not fair and equitable as a matter of law, even if statutory voting majorities approve it.
- Old equity may receive or retain an interest only if it makes a genuine, substantial contribution in “money or money’s worth” reasonably equivalent to the participation received.
- Intangible or speculative considerations (such as influence, expected management benefits, or generalized foreclosure-avoidance benefits) do not satisfy the “money or money’s worth” requirement.

## Conclusion

The Court required strict application of absolute priority in § 77B reorganizations, holding that insolvent debtors cannot grant old shareholders a meaningful stake without an equivalent new capital contribution, and that courts must independently enforce the “fair and equitable” standard regardless of creditor approval.


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