Case v. Los Angeles Lumber Products Co.

Los Angeles Shipbuilding and Drydock Corporation (Los Angeles Shipbuilding) (debtor) filed for bankruptcy under the Bankruptcy Act. A reorganization plan was proposed that allocated the reorganized corporation’s assets among Los Angeles Shipbuilding’s bondholders (creditors) and shareholders. Under the proposed plan, 77 percent of Los Angeles Shipbuilding’s assets and voting power was assigned to the bondholders, and the remaining 23 percent was assigned to the shareholders. If Los Angeles Shipbuilding were to be liquidated under the proposed plan, the bondholders would have to share its assets with the shareholders, meaning that the bondholders would receive less than the value of the company. Bondholders accounting for approximately 93 percent of the value of issued bonds approved the plan, and the remaining bondholders (the objecting bondholders) rejected the plan. The district court approved the proposed reorganization plan, finding that the required percentage of Los Angeles Shipbuilding’s bondholders had approved the plan. The district court also reasoned that the plan would benefit the bondholders because, by consenting to the plan, they were able to avoid costly litigation that would diminish the assets of Los Angeles Shipbuilding. The objecting bondholders appealed, arguing that the proposed reorganization plan was not fair and equitable.