106 Opinion of the Court. its successors. Hence we conclude, as have other courts,' that that doctrine is firmly imbedded in § 77B. 14 We come then to the legal question of whether the plan here in issue is fair and equitable within the meaning of that phrase as used in § 77B. We do not believe it is, for the following reasons. Here the court made a finding that the debtor is insolvent not only in the equity sense but also in the bankruptcy sense. Admittedly there are assets not in excess of $900,000, while the claims of the bondholders for principal and interest are approximately $3,800,000. Hence even if all of the assets were turned over to the bondholders they would realize less than 25 percent on their claims. Yet in spite of this fact they will be required under the plan to surrender to the stockholders 23 percent of the value of the enterprise. True, the relative priorities of the bondholders and the old Class A stockholders are maintained by virtue of "See In re Day & Meyer, Murray & Young, 93 F. 2d 657; Tellier v. Franks Laundry Co., 101 F. 2d 561; In re Philadelphia & Reading Coal & Iron Co., 105 F. 2d 357; In re New York Railways Corp., 82 F.2d 739, 744; 2 Gerdes on Corporate Reorganizations, § 1085. Intimations to the contrary, Downtown Investment Assn. v. Boston Metropolitan Buildings, Inc., 81 F.2d 314, 323-324; In re A. C. Hotel Co., 93 F. 2d 841, are not tenable. The statutory scheme of § 77B (in those respects which are material here) is in sharp contrast to that which was provided for compositions under former § 12. This Court said in Callaghan v. Reconstruction Finance Corp., 297 U. S. 464, 470: "Reorganizations now permitted under § 77B present certain resemblances to compositions under § 12, which have been commented upon as supporting the constitutionality of the reorganization provisions of § 77 or § 77B... But § 77B contemplates a procedure and results not permissible under § 12. Reorganizations are nowhere referred to in the statute as compositions." Under § 12 (a) (as it existed at the time § 77B was enacted) only a "bankrupt" could offer "terms of composition to his creditors." Under § 77B (d) plans may be proposed not only by the debtor but also by a designated percentage of the creditors or, where Opinion of the Court. 308 U.S. the priorities accorded the preferred stock which the bondholders are to receive. But this is not compliance with the principle expressed in Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra, that "to the extent of their debts creditors are entitled to priority over stockholders against all the property of an insolvent corporation," for there are not sufficient assets to pay the bondholders the amount of their claims. Nor does this plan recognize the "equitable right" of the bondholders "to be preferred to stockholders against the full value of all property belonging to the debtor corporation," within the meaning of the rule announced in that case, since the full value of that property is not first applied to claims of the bondholders before the stockholders are allowed to participate. Rather it is partially diverted for the benefit of the stockholders even though the bondholders would obtain less than 25% payment if they received it all. Under that theory all classes of the debtor is not found to be insolvent, by a specified percentage of stockholders. Section 12 (d) as it then existed provided that the judge "shall confirm a composition if satisfied" inter alia that "it is for the best interests of the creditors." See Fleischmann & Devine, Inc. v. Saul Wolfson Dry Goods Co., 299 F. 15. The "fair and equitable" standard employed in § 77B was not then present in § 12. Consent by the debtor to the composition was implicit in former § 12 (cf. In re Bryer, 281 F. 812). But under § 77B approval of a plan by security holders who have no equity in the enterprise is unnecessary. In re 620 Church Street Building Corp., 299 U. S. 24. The general view was well expressed in In re Dutch Woodcraft Shops, 14 F. Supp. 467, 469, "The preservation of business enterprises must not be at the expense of creditors, and the provisions of section 77B should not be taken advantage of to effect what, in fact, amounts to a composition under section 12." The Chandler Act, c. 10 (52 Stat. 840) approved June 22, 1938, now supplants § 77B. Various substantial changes in the provisions of § 77B have been made therein. But the standard of "fair and equitable" as used in § 77B remains unaltered as one of the criteria necessary for confirmation of a plan of reorganization. § 221 (2). 106 Opinion of the Court. security holders could be perpetuated in the new company even though the assets were insufficient to pay-in new bonds or stock-the amount owing senior creditors. Such a result is not tenable. 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 Ry. Co. v. Boyd, supra, and Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra. 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.15 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. But if these conditions are not satisfied the stockholder's participation would run afoul of the ruling of this Court in Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra, that "Whenever assessments are demanded, they must be adjusted with the purpose of according to the creditor his full right of priority against the corporate assets, so far as possible in the existing 15 This new money was commonly necessary in equity reorganizations not only to provide new working capital but also to pay dissenting creditors. See Weiner, Conflicting Functions of the Upset Price in a Corporate Reorganization, 27 Col. L. Rev. 132. Like considerations are relevant in reorganizations under § 77B. As stated by the court in In re Dutch Woodcraft Shops, 14 F. Supp. 467, 471: "Circumstances may exist where the success of an undertaking requires that new money be furnished and where the former stockhold-· ers are the only or most feasible source of the new capital. In such instances, the court may recognize as fair and equitable a plan which includes contributions of new money by stockholders, provided it satisfactorily appears that full recognition has been given to the value of creditors' claims against the property." Opinion of the Court. 308 U.S. circumstances" (p. 456). If, however, those conditions we have mentioned are satisfied, the creditor cannot complain that he is not accorded "his full right of priority against the corporate assets." If that were not the test, then the creditor's rights could be easily diluted by inadequate contributions by stockholders. To the extent of the inadequacy of their contributions the stockholders would be in precisely the position, which this Court said in Northern Pacific Ry. Co. v. Boyd, supra, the stockholders there were in, viz., "in the position of a mortgagor buying at his own sale" (p. 504). 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. The alleged consideration furnished by the stockholders in this case falls far short of meeting those requirements. 1. The findings below that participation by the old Class A stockholders will be beneficial to the bondholders because those stockholders have "financial standing and influence in the community" and can provide a "continuity of management" constitute no legal justification for issuance of new stock to them. Such items are illustrative of a host of intangibles which, if recognized as adequate consideration for issuance of stock to valueless junior interests, would serve as easy evasions of the principle of full or absolute priority of Northern Pacific Ry. Co. v. Boyd, supra, and related cases. Such items, on facts present here, are not adequate consideration for issuance of the stock in question. On the facts of this case they cannot possibly be translated into money's worth reasonably equivalent to the participation accorded the old stockholders. They have no place in the asset 106 Opinion of the Court. column of the balance sheet of the new company. They reflect merely vague hopes or possibilities.16 As such, they cannot be the basis for issuance of stock to otherwise valueless interests. The rigorous standards of the absolute or full priority doctrine of the Boyd case will not permit valueless junior interests to perpetuate their position in an enterprise on such ephemeral grounds.1 2. The District Court's further finding that if the bondholders were to foreclose now they would receive "substantially less than the present appraised value" of the assets of the debtor corporation is no support for inclusion of the old stockholders in the plan. The fact that bondholders might fare worse as a result of a foreclosure and liquidation than they would by taking a debtor's plan under § 77B can have no relevant bearing on whether a proposed plan is "fair and equitable" under that section. Submission to coercion is not the application of "fair and equitable" standards. Such a proposition would not only drastically impair the standards of "fair and equitable" as used in § 77B; it would pervert 16 On comparable facts a like conclusion was reached in In re Barclay Park Corp., 90 F. 2d 595, where the court said, p. 598: "It is argued that the stockholders represent the present management of the hotel and that the management is valuable and indeed necessary to the enterprise and that the manager-stockholders will 'walk out' if the proposed plan does not go through and leave the hotel to its fate. But there is no binding agreement on their part to remain which might afford a justification for giving them a stock interest and, if their managerial skill is vital to the success of the hotel, any stock issued to insure the continuance of their relation ought to go to those stockholders who are of use to the enterprise and agree to act in its behalf, and not to all stockholders as such. Indeed, the supposed advantages of retaining the existing management seem to be a matter of inference, if not of speculation, supported by the oral statements of attorneys instead of by testimony." "This conclusion is reemphasized here by the fact that not all of the Class A stockholders who receive new stock are part of the management of the debtor. |