Despite the Holiday Season, the Second Circuit Apparently Suggests that It Does Not Believe in “Gifting”

Contributed by Debra A. Dandeneau.
In a fairly unusual move, the Second Circuit, in a one-page decision, informed debtor DBSD North America that its request to vacate the stay pending appeal of the bankruptcy court’s order confirming DBSD’s plan was moot.  Unfortunately for DBSD, it was because the Second Circuit determined that the bankruptcy court erred in confirming DBSD’s plan.  See Dish Network Corp. v. Ad Hoc Comm. of Senior Noteholders (In re DBSD North America), No. 10-1175, 2010 WL 4925878 (2nd Cir. Dec. 6, 2010).
Although one of the principal focuses of the appeal and of much of the commentary on DBSD’s chapter 11 confirmation process had been the bankruptcy court’s designation of the rejecting votes of DISH Network – which the Second Circuit has stated it will uphold – the more interesting issue is likely to be why the Second Circuit has determined that the DBSD plan is nevertheless unconfirmable.  Vote designation under section 1126(e) is such a fact specific inquiry that the only precedential value of the DBSD decision on that issue may not really be the bankruptcy court’s designation of DISH’s votes, but its conclusion that, because DISH held all the claims in the rejecting class, the court either would ignore that class for purposes of determining whether the class voted to accept the plan under section 1129(a)(8) of the Bankruptcy Code or treat the class as an accepting class.
The Second Circuit indicated that it was upholding the appeal of Sprint Nextel Corporation that DBSD’s plan violated the absolute priority rule.  In doing so, it apparently disagreed with the bankruptcy court’s conclusion that the plan did not violate the absolute priority rule under the “gifting” exception to the absolute priority rule, as formulated by the First Circuit in Official Unsecured Creditors Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313-14 (1st Cir. 1993), and rejected by the Third Circuit in In re Armstrong World Industries, Inc., 432 F.3d 507, 514 (3d Cir. 2005).  The full extent to which the Second Circuit takes on the doctrine and whether it embraces the reasoning of the Third Circuit will have to await the court’s opinion.
Of course, we continue to follow this issue and will provide an update once the Second Circuit issues its full opinion.  The court gave no guidance on when this will occur, simply concluding its ruling with, “An opinion will follow in due course.”