In re Spirit Airlines, Inc

In a recent decision, the United States Bankruptcy Court for the Southern District of New York (the Court) confirmed a chapter 11 plan which included consensual third-party releases which were procured by using opt-out rather than opt-in requirements.  In re Spirit Airlines, Inc.,  ___ B.R. ___, 2025 WL 737068 (Bankr. S.D. N. Y. March 7, 2025).  To view the opinion, click here.

Facts

Spirit Airlines and affiliates filed a chapter 11 case in the Southern District of New York in November 2024.  Prior to filing it entered into a Restructuring Support Agreement (“RSA”) that provided for a comprehensive series of restructuring  transactions to deleverage the Debtors’ capital structure while preserving the going concern value of the business.   The RSA transactions were to be implemented through the chapter 11 plan.  The RSA contained an agreement of certain stakeholders (the “Consenting Stakeholders”) to convert $700 million of Senior Secured Notes and $140  million of Convertible Notes into exit secured note financing.  It also provided for equitization of the remaining Senior Secured Notes and Convertible Notes (approximately $795 million) by converting them into equity in the reorganized parent entity.  These moves freed up sufficient value to propose a plan which would pay in full all allowed priority claims and all general unsecured claims.  It was undisputed that without the concessions from the Consenting Stakeholders, the unsecured creditors would receive a low percentage under a plan.

In exchange for the concessions made by the Consenting Shareholders, they were included in the Released Parties described in the plan, with an option for any creditor to opt out.  The Plan defined Released Parties to include the Debtors, the Reorganized Debtors, the Consenting Senior Secured Noteholders, each Consenting Convertible Noteholder, and the agents and Related Parties of these entities.  The Releasing Parties were also defined but would not include

an Entity that (i) affirmatively elects to “opt out” of being a Releasing Party  by timely objecting to Confirmation or by checking the appropriate box on such Holder’s timely and properly submitted Ballot or Opt-Out Form, thereby indicating that such Holder elects to opt out of the Plan’s release provisions, or (ii) timely objects to the releases herein and such objection is not resolved before Confirmation….

Voting classes, who were impaired and therefore entitled to cast ballots, could elect to opt out by checking a box on the ballot and properly returning it.  Nonvoting classes, who were not impaired and therefore deemed to accept the plan and were not entitled to cast ballots, received an Opt-Out form on which they could check the box and return or they could opt out by using an online portal on the Case Information Website.  All creditors could opt out by objecting to the Third-Party Releases. The Court summarized when a creditor had consented:

A creditor is deemed to have consented to the Third-Party Releases if the creditor (i) timely  and properly voted to accept or reject the Plan but did not check the opt-out box on their ballot; (ii) abstained from voting on the Plan and did not check the opt-out box on a timely and properly submitted ballot, (iii) failed to timely and properly submit an Opt-Out Form with the opt-out box checked, or (iv) failed to timely and properly file an objection.

The Court noted that “[i]formation regarding the Third-Party Releases and instructions on the procedures to opt out of them were featured prominently in the Plan and Disclosure Statement.  This same information also appeared on the ballots, the Unimpaired Class Notice and the Combined Hearing Notice.”  By the time of the hearing on plan confirmation, 190 opt-out elections had been received, most submitted through the online portal.

The United States Trustee (UST) and the Securities and Exchange Commission (SEC) were the only parties to object to the Third-Party Releases.  The UST asserted that only a plan with opt-in  provisions for Third-Party Releases could be confirmed.  The SEC’s objection focused narrowly on the classes of noteholders entitled to vote, arguing that failure to return a ballot which opted out was not evidence of consent,  The Court overruled the objections and confirmed the plan with the releases.

Reasoning

The Court found the framework for allowing third-party releases was established by 11 U.S.C. § 1123(b), which provides that all members of a class will be treated the same but any class member could elect less favorable treatment.  Here, the Consenting Shareholders were consenting to less favorable treatment of the Senior Secured Notes and Convertible Notes, which freed up value to be distributed to unsecured creditors.  This statutory framework had been used to approve third-party releases in the Second Circuit, so long as the unsecured creditors also waived a right – i.e. the ability to pursue the third parties in nonbankruptcy forums – in return for the released parties contributing to the value of the plan.

In the Second Circuit, opt- out provisions had consistently been deemed to establish consent to third-party releases.  In In re Avianca Holdings, 632 B.R. 124 (Bankr. S.D. N. Y. 2021), the bankruptcy court confirmed a plan with opt-out releases so long as notice of the need to opt out was prominent and the consequence of not opting out was fully explained.  In re Cumulus Media Inc, in an unpublished ruling, had done the same, reasoning that when a  creditor had notice of the consequence of their inaction, failure to act could be deemed consent.  The Court noted a similar outcome in In re Latam Airlines Grp S.A.  2022 Bankr. LEXIS 1725 (Bankr. S.D. N. Y. 2022) because the “opt-out structure was clearly and prominently notice and explained.”

Given this weight or authority in the circuit, the Court examined the enumerated ways to opt out set forth above and determined it was sufficient for confirmation of a plan with opt-out Third-Party Releases. It examined the contrary authorities offered by the UST and SEC and was able to distinguish each case from that at hand.  It also referenced case support form outside the circuit, in particular the Fourth Circuit and the Fifth Circuit, where opt- out consent had long been allowed.  In addition, the Court weighed the likelihood that the unsecured creditors would be paid in full if the Consenting Stakeholders made the financing concessions in exchange for the releases.  Without those concessions, that class would receive much less under the plan.

In sum, the Court ruled that those creditors who did not affirmatively opt-out were bound by the known consequence of their inaction – i.e. they had consented to the releases.

Author Comments

This court’s approval of using opt-out provisions to obtain consensual third-party releases joins the majority of post Purdue decisions.  It should be noted that this is not a mass tort case.  The class of unsecured creditors is finite and the amount of their claims known.  Here, the assurance of full payment is tangible and likely will be achieved.  This is very different from the mass tort cases when the percentage of payment on the claims would be imposable to know at the time of confirmation.  The allowance of claims is often still pending and therefore the amount of the allowed claims unknowable.  Opt-out provisions in a mass tort case could be more draconian than those approved here.

[The Commercial Financial Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. This article was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group. The opinions contained herein are strictly those of the author.].