The Gift that Gives Too Much: Invalidating a Gifting Exception to the Absolute Priority Rule

In Chapter 11 reorganizations, there is a norm that all senior claimants must be paid in full before a junior claimant may be paid anything. This norm is known as the absolute priority rule, and is codified in the Bankruptcy Code as § 1129(b)(2)(B)(ii). Despite being denounced repeatedly by pre-Code common law and expressly legislated out of the Bankruptcy Code in the last century, there is a practice of senior creditors bypassing intermediate creditors in favor of lower ranked ones by “gifting” part of their distribution under the plan. Some view this practice as legitimate as a gifting exception to the absolute priority rule.This Note argues that the practice of “gifting”—when it violates the absolute priority rule—violates the express statutory language of the Code, and circumvents the legislated priority distribution. In doing so, gifting defeats all of the fairness and orderliness that justify a uniform federal bankruptcy law to begin with.

The full text of this Note is available to download as a PDF.