In a recent decision by the U.S. Bankruptcy Court for the Southern District of New York in In re Journal Register Co.,1 the Bankruptcy Court held that under a plan of reorganization a senior creditor may agree to gift a portion of its recovery to a junior creditor even though the recipient receives a larger recovery than similarly situated creditors.
Plans of reorganization that feature a senior creditor gifting assets to a junior creditor are referred to colloquially as “gift” plans. Although gift plans may serve as a useful tool for the resolution of a contentious plan process, bankruptcy courts considering such plans are mindful of the risk that they may upset the Bankruptcy Code’s carefully calibrated priority scheme and particularly the absolute priority rule,2 which states that no interest holder or creditor junior to an objecting class of creditors may receive a distribution from a bankruptcy estate until the dissenting class of creditors is paid in full.
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