In the 1939 case of Pepper v. Litton, the United States Supreme Court ruled that a bankruptcy court has broad powers to scrutinize and reject transactions between a bankrupt corporation and its stockholders if it finds them to be unfair or fraudulent. The case involved an attempt by Mr. Pepper, who was both a creditor and majority shareholder of Litton's company, to buy his own debt at a discount through another company he controlled in order to gain advantage over other creditors during bankruptcy proceedings. The court found this action as self-dealing which violated principles of fairness in dealing with corporate assets among shareholders and creditors alike. Therefore, the transaction was set aside on equitable grounds because it allowed him undue preference over other creditors while diminishing their potential recovery from the debtor's estate.

In the dissenting opinion for Pepper v. Litton, Justice Black disagreed with the majority's decision to deny recovery of damages by Pepper. He argued that there was no legal basis to prevent a stockholder from suing on behalf of his corporation if he had been wronged and could prove it in court. Furthermore, he contended that denying such right would essentially protect fraudulent directors at the expense of innocent shareholders who were victims of their misconducts. The justice also criticized the majority’s reliance on technicalities rather than focusing on substantive issues like fraud and breach of fiduciary duty committed by corporate officers against their own company and its shareholders.