The Dog That Didn't Bark - Second Circuit's Opinion in DBSD North America Disallows Gifting, But Is Silent on Cramdown of Secured Creditor

The Dog That Didn't Bark - Second Circuit's Opinion in DBSD North America Disallows Gifting, But Is Silent on Cramdown of Secured Creditor

As discussed in previous posts on this site, back in December the Second Circuit Court of Appeals issued a summary order that reversed the bankruptcy court's confirmation of the reorganization plan (the "Plan") of DBSD North America, f/k/a ICO North America ("DBSD"). The Court sustained a challenge to the Plan brought by Sprint-Nextel, an unsecured creditor, against the proposed "gift" of value from second lien secured creditors down to DBSD's equity holder, by-passing holders of unsecured claims. However, it denied the appeal brought by senior secured creditor DISH Network ("DISH"), the holder of all of DBSD's first lien debt, against its unfavorable treatment under the Plan.  The summary order stated that an opinion would follow "in due course". (Kelley Drye & Warren LLP represents the agent to the lenders that previously held the first lien debt purchased by DISH, but has taken no part in the litigation over the confirmation of the Plan or the appeals before the Second Circuit).   

The opinion has now come out and has appropriately garnered wide attention. The decision to prohibit the long-standing practice of "gifting" value to a junior class of creditors or interests over the objection of a non-consenting intermediate class will certainly shape the contours of plan negotiations in chapter 11 cases going forward. The determination to uphold the "designation" (i.e., disallowance) of DISH's vote against the Plan, for its alleged "bad faith" in pursuing a "strategic purpose", will also affect the purchase and sale of claims for purposes of acquiring control of companies as they emerge from bankruptcy (although this ruling was fact specific and narrowly focused). 

Read this article in its entirety at Kelley Drye & Warren LLP's Bankruptcy Law Insights blog

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