The peril of gift-giving, so familiar among family and friends, was recently examined in the Chapter 11 plan context by the U.S. Court of Appeals for the Second Circuit in In re DBSD N.A. Inc.1 At issue was the commonly used and common law-blessed practice of “gifting,” the voluntary transferring of rights or interests by a senior creditor class to a junior creditor class to facilitate confirmation of a proposed reorganization plan.
The Second Circuit reversed confirmation of a plan, holding that its gifting provisions violated the absolute priority rule, which provides that a reorganization plan is not “fair and equitable” with respect to a dissenting class of impaired creditors unless the creditors in that class are paid in full or no junior creditors or equity holders receive a distribution under the plan. In holding that the senior creditors in DBSD could not transfer a portion of their recoveries to shareholders over the objection of impaired unsecured creditors, the Second Circuit aligned itself with the Third Circuit.
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