Although the concept dates back several decades, in recent years “gifting” plans have become popular vehicles for avoiding the Bankruptcy Code’s absolute priority rule: a portion of the senior creditor’s recovery is “gifted” to a more junior class (skipping intermediate class or classes) to gain the approval of stakeholders whose approval is strategically important, but who would otherwise receive no distribution under a plan. On February 7, 2011, the Second Circuit Court of Appeals in In re DBSD North America, Inc., declared that such a plan violated the absolute priority rule. Although the Third Circuit had weakened the gifting doctrine in the 2005 decision of In re Armstrong World Industries, Inc., the recent DBSD decision may have eliminated it in the context of a Chapter 11 plan.
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