In re DBSD North America, Inc.: Second Circuit Rules that Gifting Doctrine Violates the Absolute Priority Rule

February 9, 2011

Below is an Alert Memo addressing an important bankruptcy law decision handed down earlier this week by the U.S. Court of Appeals for the Second Circuit in In re DBSD North America, Inc., where the Court denied confirmation of a Chapter 11 plan because it violated the absolute priority rule. Under the plan, the debtor’s existing equityholder was to receive a distribution on account of its equity interests, even though a dissenting senior class of unsecured creditors was not receiving payment in full. The practice of gifting has become commonplace in a number of recent Chapter 11 plans as a means of fostering consensual reorganizations. While the decision by the Second Circuit potentially limits the flexibility that a plan proponent has in structuring gifts to junior classes, the decision leaves open several possibilities, suggesting gifting may still be available in certain circumstances.