The United States Court of Appeals for the Second Circuit recently handed down a ground-breaking decision in the DBSD North America bankruptcy case.1 The DISH Network decision should reinforce a chapter 11 debtor’s primary responsibility of maximizing the value of its business and, absent a 363 sale, refocus negotiations on a consensual plan. Most importantly, DISH Network dealt a powerful blow to the controversial practice of “gifting” by which a high priority (often secured) class of creditors bypasses an intermediate class by making a “gift” to a lower priority (often equity) class. In addition, the court affirmed the designation and consequent disqualification of votes cast by DISH Network Corp., a DBSD competitor that acquired debt after the plan was filed with a view to using its vote to block the plan and promoting its own acquisition intentions. Not surprisingly, the ultimate impact of this decision was the submission by DISH of a substantially enhanced offer for the debtors’ business.
DBSD North America Inc. (“DBSD” or “the debtors”) is a wholly-owned subsidiary of media enterprise ICO Global. DBSD’s proposed plan, which was confirmed by the bankruptcy court, gave the bulk of DBSD reorganized equity to second lien creditors, distributed an equity “tip” to general unsecured creditors, and provided some equity and certain warrants to ICO Global. Equity distributed to ICO Global was allegedly from value otherwise distributable to the secured creditors, who wanted cooperation in proposing and prosecuting a favorable plan, and also wanted ICO Global to manage reorganized DBSD’s business. After the unsecured creditors rejected the plan, the plan could only be confirmed in reliance upon the “cramdown” provisions of chapter 11, which mandate the application of the absolute priority rule to dissenting and junior classes. Following an analysis of the history of the “absolute priority rule,” as adopted in chapter 11 of the Bankruptcy Code, the court concluded that the rule, once invoked by virtue of a debtor’s attempt to “cramdown” a plan over a class of dissenting creditors, cannot be reconciled with “gifting.” This ruling, in combination with affirming the designation of a competitor’s vote, serves as a stark warning to those seeking to “end run” chapter 11 plan requirements and avoid negotiation with its fiduciaries—the debtor and unsecured creditors’ committee. In those instances where plan negotiations prove unsuccessful, DISH Network may increase the likelihood of sales, restoring fertile ground for distress M&A and complicating, if not frustrating, “loan to own” strategies.
Background and Lower Courts
