Second Circuit Rejects Gifting Exception to Absolute Priority Rule and Affirms Vote Designation for Claims Acquired in Bad Faith

February 17, 2011
The United States Court of Appeals for the Second Circuit recently issued an opinion rejecting the often-used gifting doctrine in the context of a plan of reorganization on the one hand, while affirming vote designation for claims not purchased in good faith on the other. The decision will have significant implications on the ability of parties seeking to gift portions of their recovery to junior classes as a way to accelerate an efficient and non-adversarial chapter 11 case. This update examines the DBSD decision and how it will impact the chapter 11 landscape.