In re DBSD North America, Inc.: Second Circuit rules that gifting doctrine violates the absolute priority rule

On February 7, 2011, in In re DBSD North America, Inc. (“DBSD”), the United States Court of Appeals for the Second Circuit held it was error for the bankruptcy court to confirm a Chapter 11 plan that provided for a “gift” from the debtor’s undersecured second-lien noteholders to the debtor’s existing equityholder. The Second Circuit found that the gifting provision contained in the plan violated section 1129(b)(2)(B) of the Bankruptcy Code, because the existing equityholder was to receive a distribution under the plan on account of its equity interests, even though a dissenting senior class of unsecured creditors was not receiving payment in full of its allowed claims.