given only a face amount of inferior securities equal to the face amount of their claims. They must receive, in addition, compensation for the senior rights which they are to surrender. If they receive less than that full compensatory treatment, some of their property rights will be appropriated for the benefit of stockholders without compensation. That is not permissible. The plan then comes within judicial denunciation because it does not recognize the creditors' "equitable right to be preferred to stockholders against the full value of all property belonging to the debtor corporation." Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra, p. 454. Practical adjustments, rather than a rigid formula, are necessary. The method of effecting full compensation for senior claimants will vary from case to case. As indicated in the Boyd case (228 U. S. at p. 508) the creditors are entitled to have the full value of the property, whether "present or prospective, for dividends or only for purposes of control," first appropriated to payment of their claims. But whether in case of a solvent company the creditors should be made whole for the change in or loss of their seniority by an increased participation in assets, in earnings or in control, or in any combination thereof, will be dependent on the facts and requirements of each case. So long as the new securities offered are 27 "In view of the condition of the record relative to the value of the properties and the fact that the accrued interest is cancelled by the plan, it is not profitable to attempt a detailed discussion of the deficiencies in the alleged compensatory treatment of the bondholders. It should, however, be noted as respects the warrants issued to the old common stockholders that they admittedly have no equity in the enterprise. Accordingly, it should have been shown that there was a necessity of seeking new money from them and that the participation accorded them was not more than reasonably equivalent to their contribution. Kansas City Terminal Ry. Co. v. 301335°-41 -34 Opinion of the Court. 312 U.S. of a value equal to the creditors' claims, the appropriateness of the formula employed rests in the informed discretion of the court. The Circuit Court of Appeals, however, made certain statements which if taken literally do not comport with the requirements of the absolute priority rule. It apparently ruled that a class of claimants with a lien on specific properties must receive full compensation out of those properties, and that a plan of reorganization is per se unfair and inequitable if it substitutes for several old bond issues, separately secured, new securities constituting an interest in all of the properties. That does not follow from Case v. Los Angeles Lumber Products Co., supra. If the creditors are adequately compensated for the loss of their prior claims, it is not material out of what assets they are paid. So long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis, the requirements of "fair and equitable" are satisfied. Any other standard might well place insuperable obstacles in the way of feasible plans of reorganization. Certainly where unified operations of separate properties are deemed advisable and essential, as they were in this case, the elimination of divisional mortgages may be Central Union Trust Co., supra; Case v. Los Angeles Lumber Products Co., supra, pp. 121–122. In the latter case we warned against the dilution of creditors' rights by inadequate contributions by stockholders. Here that dilution takes a rather obvious form in view of the lower price at which the stockholders may exercise the warrants. Warrants exercised by them would dilute the value of common stock purchased by bondholders during the same period. Furthermore, on Consolidated's estimate of the equity in the enterprise, the values of the new common would have to increase many fold to reach a value which exceeds the warrant price by the amount of the accrued interest. necessary as well as wise. Moreover, the substitution of a simple, conservative capital structure for a highly complicated one may be a primary requirement of any reorganization plan. There is no necessity to construct the new capital structure on the framework of the old. Affirmed. HELVERING, COMMISSIONER OF INTERNAL REVENUE, v. LE GIERSE ET AL., EXECUTORS. CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT. No. 237. Argued January 9, 10, 1941.-Decided March 3, 1941. 1. Within the meaning of § 302 (g) of the Revenue Act of 1926 as amended, amounts "receivable as insurance" are amounts receivable as the result of transactions which involved at the time of their execution an actual insurance risk. P. 537. 2. Risk-shifting and risk-distribution are essentials of a contract of life insurance. P. 539. 3. A contract in the standard form of a life insurance policy, containing the usual provisions, including those for assignment or surrender, was issued to a woman of eighty years of age, without physical examination, for a single premium less than the face of the policy, together with an annuity policy for another premium calling for annual payments to her until her death Although both policies were, on the face, separate contracts, neither referring to the other, and each was treated as independent in the matters of application, computation of premium, report and book entry of premium payment, maintenance of reserve, etc., they were issued at the same time, and the making of the annuity contract was a condition to the issuance of the life policy; and the combined effect was such that, in case of premature death, the gain to the insurance company under one would neutralize its loss under the other. Held: (1) That the contracts must be considered together. P. 540. Argument for Respondents. 312 U. S. Any risk that the prepayment would earn less than the amount paid by the insurance company as an annuity was an investment risk, not an insurance risk. (3) The amount payable to the beneficiary named in the life policy, upon the death of the "insured," was not in the scope of § 302 (g), supra, but was properly taxed in the decedent's estate under § 302 (c) as a transfer to take effect in possession or enjoyment at or after death. P. 542. 110 F. 2d 734, reversed. CERTIORARI, 311 U. S. 625, to review the affirmance of a decision of the Board of Tax Appeals, 39 B. T. A. 1134, reversing a deficiency assessment of estate tax. Assistant Attorney General Clark, with whom Solicitor General Biddle and Messrs. Sewall Key, J. Louis Monarch, Richard H. Demuth, and Maurice J. Mahoney were on the brief, for petitioner. Mr. Frederick O. McKenzie for respondents. The life insurance policy and the annuity were separate, distinct, complete contracts. For each there was a separate application and a separate consideration. Regular, standard forms were used. Neither referred to the other directly or indirectly; either could have been surrendered without affecting the company's liability under the other. The company regarded the transactions as separate and distinct and they were so reported to the Commissioner of Insurance of the State of Connecticut, as required by law. Separate receipts were issued to the decedent by the company covering payment received by it for each contract. The consideration, or premium, for each contract was computed on an actuarial basis and in accordance with the company's regular schedule of rates. In other words, in computing the single premium charged for the life insurance policy, no adjustment or allowance was made for the annuity premium, and in computing the annuity premium, no adjustment or allowance was 531 Argument for Respondents. made for the insurance premium. The amount received by the company as a single premium for the insurance policy was credited to its insurance reserve and the amount received by it for the annuity, to its annuity reserve. All the legal incidents of ownership enjoyed by the owner of any ordinary life insurance policy were vested in the decedent with respect to the policy here in question and she could have exercised any or all of them without reference to the annuity contract. All the evidence points to an intention of the parties to enter into a life insurance and an annuity contract, separate, distinct and independent of each other. Williston, Contracts, 2d Ed., § 628. Even where the contracting parties combine all their promises in one document, if the agreement sets forth separate features, clearly severable, each feature must be given its proper application. Equitable Life Assur. Society v. Deem, 91 F. 2d 569, 575; Connecticut General Life Ins. Co. v. McClellan, 94 F. 2d 445, 446; Downey v. German Alliance Ins. Co., 252 F. 701, 703, 704; Legg v. St. John, 296 U. S. 489, 490-495; Bodine v. Commissioner, 103 F. 2d 982, 985. Dist'g Pearson v. McGraw, 308 U. S. 313. Contracts executed as a condition precedent to, or in conjunction with, other contracts are commonplace in business transactions. With respect to the issuance of the annuity as a condition precedent to the issuance of the life insurance policy, we think that the court below covered the point succinctly when it said: "The fact that she could not have gotten that policy unless she had also bought an annuity contract does not change the character of what she got." The decedent's age and the fact that she was not required to take a physical examination are in no way material to the issues. |