Earlier this year, the U.S. Court of Appeals for the Second Circuit held, by a 2-1 panel vote, that a proposed “gifting” plan distributing value from certain secured lenders to the prepetition shareholder violated the absolute priority rule and was confirmed in error.1 In DISH Network Corp. v. DBSD North America Inc. (In re DBSD NorthAmerica Inc.), the Second Circuit also affirmed unanimously the designation of the vote of a competitor that had purchased an entire class of claims to block the plan’s confirmation and acquire strategically the assets of the debtor, DBSD. This opinion aligns the Second Circuit with the Third Circuit by essentially prohibiting certain class-skipping gifting plans and raises a host of questions about the applicability of gifting in bankruptcy. The ruling also curtails a competitor’s ability to purchase bankruptcy claims for strategic purposes.

Background

On May 15, 2009, DBSD filed for Chapter 11 relief in the U.S. Bankruptcy Court for the Southern District of New York. Following negotiations, DBSD filed a “gifting” plan of reorganization, pursuant to which holders of DBSD’s second lien debt would receive the majority of the reorganized company’s equity and then “gift” portions of that equity to DBSD’s pre-bankruptcy shareholder, ICO Global Communications, and the unsecured creditors.

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