Case v. Los Angeles Lumber Products Co

In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), the Court stated: 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 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 and Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra 271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028. Especially in the latter case did this Court stress the necessity, at times, of seeking new money "essential to the success of the undertaking" from the old stockholders. Where that necessity exists and the old stockholders make a fresh contribution and receive in return a participation reasonably equivalent to their contribution, no objection can be made. Id. at 121, 60 S.Ct. at 10. The Court continued by stating that if these conditions were satisfied, the creditor cannot complain that he is not accorded "his full right of priority against the corporate assets." In view of these considerations we believe that to accord "the creditor his full right of priority against the corporate assets" where the debtor is insolvent, the stockholder's participation must be based on a contribution in money or in money's worth, reasonably equivalent in view of all the circumstances to the participation of the stockholder. Id. at 122, 60 S.Ct. at 10.