no interest in the debtor. Nevertheless under the plan of reorganization they will continue to retain 615 shares of preferred stock of exactly the same kind as are being given to present creditors in payment of their claims and in addition will retain 1,000 common shares and full voting control of the corporation. Curiously enough this plan, which places stockholders who have no present interest on an equality with general creditors, has been approved by 94% in amount of these creditors. It may well be that this result was reached by reason of the omission of the plan to disclose this situation. Regardless of this, however, we find ourselves unwilling to say that such a plan is fair and equitable.
The special master in recommending the confirmation of the plan suggested that such confirmation be upon condition that the plan be amended so as to give the preferred stockholders full power to elect three-fifths of the board of directors at the expiration of sixty days after any default in the payment of preferred dividends. It is to this recommendation that the exception filed by the debtor is directed. The exception must be overruled. The proposed amendment is in line with the policy of the law as laid down by Section 216(12) (a) of the Bankruptcy Act, as recently amended by the Chandler Act, 11 U.S.C.A. § 616(12) (a), as follows:
"Sec. 216 [§ 616]. A plan of reorganization under this chapter * * *
"(12) shall provide for the inclusion in the charter of the debtor, or any corporation organized or to be organized for the purpose of carrying out the plan, of -- (a) provisions prohibiting the debtor or such corporation from issuing non-voting stock, and providing, as to the several classes of securities of the debtor or of such corporation possessing voting power, for the fair and equitable distribution of such power among such classes, including, in the case of any class of stock having a preference over other stock with respect to dividends, adequate provisions for the election of directors representing such preferred class in the event of default in the payment of such dividends; * * *."
Under the provisions of the Chandler Act this section is not applicable to reorganization proceedings instituted prior to the amendment unless its application is deemed to be practicable by the court. Its application in the present case is, however, not only practicable but eminently fair and equitable. As the special master points out, the present plan permits the control and management of the debtor to remain in the hands of the present stockholders whose interest has been completely wiped out. Creditors are given a portion of the preferred stock without any real power to enforce their preference.
The amendment recommended by the special master does not, in our opinion, go far enough, however. We think that fair dealing and equity demand in a situation where stockholders are asking to retain a position which is not supported by a present interest in the debtor's assets, that full voting control of the corporation be given to the creditors. In the present case this may be accomplished by an amendment to the plan which will give to the preferred stock full voting rights on an equality, share for share, with the Class B Common stock and by a further amendment which will reduce the number of common shares from 1,000 et 100, each 10 present common shares being converted into 1 new common share. These amendments are obviously for the benefit of the creditors and consequently need not be submitted to them for their approval.
In addition to this, as we have intimated above, we cannot approve as fair and equitable a plan which permits existing stockholders having no equity whatever in the debtor to retain preferred stock which will share in all respects equally with the preferred stock being given to creditors in payment of their claims. It might well be urged that the existing stockholders should not be permitted to participate at all. In re Day & Meyer, Murray & Young, 2 Cir., 96 F.2d 657. In any event, however, fair dealing and equity demand that these existing preferred stocholders give up their preferences and concede a prior position to the creditors. Price v. Spokane Silver & Lead Co., 8 Cir., 97 F.2d 237. This may take the form of an exchange of their shares for newly authorized second preferred or common shares as they may elect, but an amendment to accomplish this subordination of the interests of the existing preferred stockholders must be made if the plan is to be confirmed. This amendment is likewise wholly for the benefit of the creditors and need not be resubmitted to them.
The exceptions to the report of the special master are dismissed and the report is confirmed, modified to the extent herein indicated. A decree may be entered confirming the plan, conditioned upon its being amended as herein indicated.
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