306 U.S. 307 (1939)
The petitioners are a committee for the protection of preferred stockholders of Deep Rock Oil Corporation, a Delaware corporation engaged in producing, refining, and selling gasoline, oil, and other petroleum products from lands in Oklahoma, Kansas, Texas, and Arkansas.1 The respondents are the trustee of the debtor, a reorganization committee representing noteholders and preferred stockholders, and Standard Gas and Electric Company, which owns practically all of the common stock of the debtor and claims as a creditor.
Deep Rock was organized in 1919 to take over properties then operated by C. B. Shaffer.2 Standard, controlled by Byllesby & Company, arranged financing that included the public sale of $12,000,000 in first mortgage bonds, issuance of preferred and common stock, and cash payments leaving Deep Rock with approximately $6,700,000 in cash and $12,000,000 in mortgage debt.3 In 1921 Shaffer sold his common stock to Standard and surrendered preferred shares, after which Standard exercised complete control through a majority of directors who were its officers or agents, with all fiscal affairs managed by Standard as banker and sole source of financial aid.4
Deep Rock declared and paid dividends on preferred and common stock despite its borrowing needs.5 Standard caused properties such as the Bradstreet leases and cracking plant to be titled in subsidiaries to avoid mortgage liens while charging Deep Rock substantial rentals.6
Deep Rock entered receivership in March 1933 and § 77B proceedings in June 1934.7 Standard filed its creditor claim, which was referred to a master for months of hearings at which all witnesses and documents came from the two companies.8 Preferred stockholders intervened and joined objections to the claim.9 Standard proposed a compromise allowing the claim at $5,000,000, leading to reorganization plans that an appraisal valued Deep Rock assets at $16,800,000 and proposed issuing $10,000,000 in debentures plus 520,000 common shares with allocations giving Standard approximately seventy-three percent of the equity.10
The District Court initially rejected one plan but later approved the compromise and modified plan over petitioners' objections.11 The Circuit Court of Appeals affirmed by a divided vote.12
Whether the District Court abused its discretion in approving the compromise of a claim by a parent against a subsidiary corporation, and a plan of reorganization based upon the compromise, in proceedings under § 77B of the Bankruptcy Act?13
Under § 77B of the Bankruptcy Act, the court as a court of equity must recognize the rights of preferred stockholders arising out of the parent's wrongful mismanagement.14 The court may modify or alter stockholder rights in a reorganization plan.15 The corporate entity will not be regarded when doing so would work fraud or injustice.16
Yes. The facts establish that Standard exercised complete domination over Deep Rock from 1921 onward, maintaining it in an undercapitalized state while extracting excessive management fees, interest, and rental payments through controlled transactions such as the Refining Company lease arrangement that charged Deep Rock millions in rent for properties it effectively owned. These practices, including the payment of dividends while the company borrowed heavily from Standard, directly contributed to Deep Rock's insolvency and the preferred stockholders' injury.17 The approved plan, which gave Standard seventy-three percent of the equity without according the preferred stockholders priority or equal management voice, perpetuated the injustice rather than remedying it as equity requires.18
The District Court therefore exceeded the bounds of reasonable discretion in approving the compromise and plan.19
The District Court abused its discretion in approving the compromise and the plan of reorganization.20