Opinion ID: 1480159
Heading Depth: 1
Heading Rank: 1

Heading: Is the Plan Fair and Equitable?

Text: Standard is the owner of 969 shares of the preferred stock of the debtor. The plan provides for the organization of a new corporation and for issuance by it of twelve-year sinking fund debentures, dated January 1, 1940, bearing interest at the rate of 6 per cent per annum, aggregating $5,500,000, and of 400,000 shares of common stock without par value. It provides for the payment in cash of general claims aggregating $60,000. It further provides for the payment to the holders of convertible gold notes, [4] of $500,000 in cash and for the distribution to them of the new notes and 75 per cent of the new common stock. It provides for the distribution to the holders of 7 per cent cumulative, convertible preferred stock without par value, aggregating 50,000 shares, 25 per cent of the new common stock. The appraisal of the debtor's assets as of November 30, 1939, showed a valuation of $16,250,000. Interim distributions were made pursuant to orders of the court to the noteholders aggregating $2,400,000. The trustee filed a report on July 24, 1940, fixing the value of the debtor's assets as of May 31, 1940, at $15,240,415. In the orders here challenged, the court found that the trustee's valuation reports and appraisals correctly reflected the going concern value of the assets of the debtor. Standard does not challenge those findings here. Approved claims of general creditors aggregate $60,000 and under the plan are to be paid in cash. The estimated cost of administrative expenses is $500,000. This leaves $14,680,415, for distribution to the noteholders and the preferred stockholders. The book value of the common stock on the basis of the above figures is $8,680,415. [5] The claims of the noteholders as of May 31, 1940, aggregated $14,350,000. They have received, as interim distributions, $2,400,000. Under the plan, they will receive new notes aggregating $5,500,000, $500,000 in cash, and new common stock of the book value of $6,510,311. If we accord the stock its book value, they will receive in cash and securities $560,311 in excess of their claims. [6] But in lieu of cash, they are receiving for $11,450,000 of their claims, twelve-year notes aggregating $5,500,000 and common stock of the book value of $6,510,311. That is to say, they are extending the time of payment on $5,500,000 of their claims and accepting a junior security for $5,950,000 of their claims. The noteholders are entitled to compensation for the loss of priority. Mr. Finletter in his work, The Law of Bankruptcy Reorganization, 1939, says, if a debtor has outstanding common stock, preferred stock and debt, the securities given to the creditors (in the absence of some quid pro quo) must not only be senior to those given to the preferred stock, but the seniority must be for the full principal and accrued unpaid interest of the debt. In its advisory report, filed April 29, 1940, the Securities and Exchange Commission approved the second amended plan of reorganization before the modification of May 20, 1940, as fair and equitable, although it only provided for a distribution of 20 per cent of the new common stock to the preferred stockholders, and by its supplemental advisory report, filed May 27, 1940, the Securities and Exchange Commission approved the second amended plan as modified May 20, 1940. While the noteholders, if the common stock be accorded its book value, will receive $560,311 in excess of their claims, we do not think that excess more than compensates them for their loss of priority. We conclude that the plan is fair and equitable to the preferred stockholders.