Taylor v. Standard Gas & Electric Company

Supreme Court of the United States · 1939 · Corporations

306 U.S. 307 (1939)

Updated August 22, 2026

CorporationsCorporate reorganizationParent-subsidiary relationsEquitable subordination§ 77Breorganizationparent corporationsubsidiary

Facts

Standard came to completely control Deep Rock through ownership of its common stock and domination of its board, officers, and fiscal affairs. Deep Rock was inadequately capitalized and heavily indebted from the outset, and Standard managed it in a way that maintained a stranglehold over it, including charging interest and management fees, causing dividend payments despite weak finances, and placing valuable properties in a Standard-controlled affiliate and leasing them back to Deep Rock on burdensome terms. When Deep Rock entered receivership and then § 77B proceedings, Standard filed a creditor claim exceeding $9 million based on an open account, which the trustee and intervening preferred stockholders attacked as involving fraudulent and improper transactions. Before the master reported on the claim, Standard proposed a compromise for $5 million, and the approved amended plan gave noteholders debentures and cash, while allocating about 73% of the new common stock to Standard, 19% to old preferred stockholders, and 8% to noteholders.

Issue

Did the District Court abuse its discretion in approving the compromise of Standard's claim and the reorganization plan where Standard had completely dominated and mismanaged Deep Rock and the plan gave Standard a controlling share of the equity in the new company? More specifically, could a court of equity approve a § 77B plan that failed to give preferred stockholders priority over Standard in the remaining equity and at least equal voice in management?

Rule

Under § 77B, a court approving a reorganization plan acts as a court of equity and is authorized and required to recognize the rights and status of preferred stockholders arising from a controlling stockholder's wrongful and injurious conduct in mismanaging the debtor's affairs. The doctrine of corporate entity will not be regarded when adherence to it would work fraud or injustice, and no plan should be approved that does not give injured preferred stockholders participation in the equity prior to the controlling parent and at least equal voice with it in management where equity remains after satisfaction of creditors.

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Riverbend Transit Holdings owns nearly all the voting stock of Lakefront Freight Lines, a debtor in a federal corporate reorganization proceeding in Chicago. For years, Riverbend dominated Lakefront’s board and finances, caused it to pay recurring advisory fees to a Riverbend affiliate, and required dividend payments to preserve Riverbend’s control even when Lakefront lacked working capital. After secured and note creditors are fully provided for, the proposed plan gives Riverbend 68% of the new common stock and all board control, while old preferred stockholders receive 20% of the stock and no guaranteed management role.

Should the court approve the plan over the preferred stockholders’ objection?

Explanation. The majority held that in a § 77B-type reorganization the court acts as a court of equity and must protect preferred stockholders injured by the controlling parent’s wrongful domination and mismanagement. If equity remains after creditors are satisfied, no plan should be approved that lets the parent participate ahead of, or unfairly with, those preferred stockholders. The defect is not limited to total invalidity of the parent’s claim; the unfairness lies in giving the parent dominant equity and control despite its injurious conduct.