In Re Dbsd North America, Inc.

634 F.3d 79 (2011)

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Nature of the Case

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Facts

P filed Chapter 11. There was a first lien debt of a $40 million revolving credit facility, a second lien debt of $650 million in 7.5% convertible senior secured notes holding a second-priority security interest in substantially all of P's assets. D had an unliquidated, unsecured claim based on a lawsuit against a P subsidiary. Sprint had sued seeking reimbursement for P's share of certain spectrum relocation expenses under an FCC order. In this case, P filed a claim against each of the P entities jointly and severally, seeking $211 million. P proposed a plan of reorganization where the second lien debt would receive the bulk of the shares of the reorganized entity, which the bankruptcy court estimated would be worth between 51% and 73% of their original claims. P would receive shares estimated as worth between 4% and 46% of their original claims. The existing shareholder (ICO) would also receive shares and warrants in the reorganized entity. D objected in that the plan violates the absolute priority rule under §1129(b)(2)(B). The plan provided for the existing shareholder, whose interest is junior to D's class of general unsecured claims, to receive substantial quantities of shares and warrants under the plan - in fact, much more than all the unsecured creditors received together. As such D took the position that the plan could not be approved. The bankruptcy court characterized the shares and warrants as a 'gift' from the holders of the Second Lien Debt, who are senior to D in priority yet who were themselves not receiving the full value of their claims, and who may therefore 'voluntarily offer a portion of their recovered property to junior stakeholders' without violating the absolute priority rule. The court held that it would permit such gifting when the gift comes from secured creditors, where there are understandable reasons for the gift, where there are no ulterior, improper ends, and where the complaining creditor would get no more if the gift had not been made. The district court affirmed the order. D appealed.