Second Circuit Rejects 'Gifting' in 'DBSD' Ruling

Previously published in New York Law Journal

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