Sprint objected to the plan arguing that the plan violates the absolute priority rule of section 1129(b)(2)(B)(ii) of the Bankruptcy Code. The rule requires that no junior claimholder can receive any property under a plan of reorganization on account of its junior claim if both the following are true:

Sprint observed that the plan provided for Parent, whose interest is junior to Sprint's class of general unsecured claims, to receive significant amounts of shares and warrants under the plan. As a result, Sprint argues that the plan fails to satisfy the absolute priority rule and ought not to be confirmed. The bankruptcy court disagreed, holding that the shares and warrants that Parent was to receive under the plan were a gift from the holders of the second lien debt who themselves would not receive the full value of their claims. The bankruptcy court held that it would permit such a gift in circumstances where:

DISH had purchased the claims of various creditors, including all of the first lien debt, after DBSD had made its Chapter 11 filing and filed its plan disclosure. As well as launching a number of its own satellites for its satellite television operations, DISH also had a significant investment in a direct competitor of DBSD.

DISH voted its claims against confirmation of the plan and argued that the plan:

The bankruptcy court designated (meaning to disregard) DISH's vote and disregarded the first lien debt as a class of creditor for purposes of determining the plan's acceptance. The bankruptcy court also held that the plan was feasible and that, even if DISH's vote had counted, the plan gave DISH the indubitable equivalent of its claim that could therefore be crammed down over DISH's objection.

The absolute priority rule provides that a plan of reorganization cannot give property to junior claimholders on account of their claims unless all classes of senior claims either:

The Court addressed the arguments that the bankruptcy court should not have designated DISH's vote as not in good faith and ought not to have disregarded the entire class of claims that DISH's claim comprised. The Court also considered whether the plan was feasible.

The Court adopted a broad view of standing and held that there should be no rule forbidding all appeals by out-of-the-money creditors. This would bar a large percentage of creditors in bankruptcy courts from ever reaching the district court or the court of appeals, however erroneous the bankruptcy court's orders might be. The Court noted that the application of such a rule in the DBSD case would mean that only two out of 26 classes of claims could bring an appeal and the remaining 24 classes would have to be satisfied with whatever the plan awarded them. In addition, the Court held that the merits of an underlying claim should in no way affect standing to appeal.

The DBSD decision appears to end the practice of gifting under Chapter 11 plans within the US Court of Appeals for the Second Circuit. In 2005, the US Court of Appeals for the Third Circuit also outlawed this practice in its decision in In re Armstrong World Industries (432 F.3d 507 (3d Cir. 2005)). Therefore, gift plans are no longer permitted in New York and Delaware, the two most popular jurisdictions for large Chapter 11 cases. However, the US Court of Appeals for the First Circuit permitted a gifting plan in the context of a Chapter 7 liquidation in its decision in In re SPM Manufacturing Corp. (984 F.2d 1305 (1st. Cir. 1993)). This potential circuit split may be considered by a debtor when selecting a venue to file a bankruptcy case, if it contemplates proposing a plan that may require a gifting component.

This aspect of the DBSD decision may not make a practical difference because the court did not address whether the absolute priority rule prohibits gifting outside of a plan. This leaves open the possibility of senior creditors agreeing to make side payments to junior creditors or shareholders after the Chapter 11 case is over. However, if the parties are not open about these arrangements and they are discovered by the bankruptcy judge or the intermediate creditors, they may risk the imposition of remedies such as the appointment of a trustee, equitable subordination or loss of voting rights. On the other hand, if the parties disclose these arrangements, it may be harder to find a valid objection to gifts made outside of a bankruptcy case.

Whether or not gifts are permitted outside of a plan, it can be argued that the Second Circuit's rejection of gifting plans destroys a potentially valuable tool that debtors and senior creditors can use to help reach consensus among creditors to promote plan confirmations. Instead, the DBSD decision gives additional leverage to hold-out junior creditors that could result in less plan confirmations and more section 363 sales or liquidations (see Practice Note, Buying Assets in a Section 363 Bankruptcy Sale: Overview).

Finally, as the Court points out, a creditor in Sprint's intermediary position must be careful about using the leverage it derives from threatening enforcement of the absolute priority rule, particularly when the intermediate creditor is itself a beneficiary of a gift under the plan. If the intermediate creditor's demands outweigh the gift's perceived benefits to the senior creditor, the senior creditor may chose to withdraw the gifts to both junior classes entirely, leaving the intermediate creditor worse off than if it hadn't objected at all.

The Court found that any inquiry whether a party acted in good faith is fact-driven, but not every ulterior motive is improper and constitutes bad faith. However, in DISH's case, the evidence pointed to DISH using votes it had bought to try to secure an advantage in pursuing a strategic transaction.

The Court emphasized that it did not intend its decision to be a categorical prohibition on purchasing claims with acquisitive or other strategic intentions. It left open the question of whether a preexisting creditor could vote with strategic intentions, and insisted that its ruling should only deter an attempt by a creditor to obtain a blocking position in order to control the bankruptcy process for a strategic asset.

It is hard to predict how this aspect of the DBSD decision will apply to future cases since the determination of good faith is so highly fact-specific.