Spirit Airlines, Inc.
MEMORANDUM OF DECISION
A P P E A R A N C E S:
Counsel for the Debtors and Debtors in Possession
450 Lexington Avenue
New York, New York 10017
By: Marshall S. Huebner, Esq.
Darren S. Klein, Esq.
Benjamin S. Kaminetzky, Esq.
Marc J. Tobak, Esq.
Christopher S. Robertson, Esq.
Moshe Melcer, Esq.
Kayleigh Yerdon, Esq.
WILLIAM K. HARRINGTON
United States Trustee, Region 2
Office of the United States Trustee
Alexander Hamilton U.S. Custom House
One Bowling Green, Room 534
New York, New York 10004
By: Shara Cornell, Esq.
Annie Wells, Esq.
Eric Bradford, Esq.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
100 Pearl Street, Suite 20-100
New York, New York 10004
By: Neal Jacobson, Esq.
Alistaire Bambach, Esq.
Morgan Bradylyons, Esq.
PAUL HASTINGS LLP
Counsel for the Ad Hoc Group of Convertible Noteholders
71 South Wacker Drive, Suite 4500
Chicago, Illinois 60606
By: Matthew L. Warren, Esq.
Geoffrey M. King, Esq.
William Reily, Esq.
Valerie Eliasen, Esq.
AKIN GUMP STRAUSS HAUER & FELD LLP
Counsel for the Ad Hoc Group of Senior Secured Noteholders
One Bryant Park
New York, New York 10036
By: Michael S. Stamer, Esq.
Abid Qureshi, Esq.
Jason P. Rubin, Esq.
-and-
2001 K Street N.W.
Washington, DC 20006
By: Blaine Scott, Esq.
WILLKIE FARR & GALLAGHER LLP
Counsel for the Official Committee of Unsecured Creditors
787 Seventh Avenue
New York, New York 10019
By: Brett H. Miller, Esq.
Todd M. Goren, Esq.
Christine Thain, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court are two objections to the request of the above-captioned debtors (collectively, the “Debtors“) for final approval of the Disclosure Statement for the Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates [ECF No. 270]1 (the “Disclosure Statement“) and confirmation of the First Amended Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates [ECF No. 354] (as further amended and supplemented, the “Plan“). See Debtors’ Memorandum of Law in Support of Final Approval of the Disclosure Statement and Confirmation of the First Amended Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates [ECF No. 390] (the “Confirmation Brief“).2 The Plan before
The two objections were filed by the Office of the United States Trustee (the “UST“) and the U.S. Securities and Exchange Commission (the “SEC” and, together with the UST, the “Objectors“).4
A hearing was held on February 13, 2025 to consider both final approval of the Disclosure Statement and confirmation of the Plan.5 See generally Hr‘g Tr. (Feb. 13, 2025) [ECF No. 509]. Setting aside the dispute over the Third-Party Releases, the Court found that the Disclosure Statement and Plan satisfied all other requirements of applicable law. See generally Hr‘g Tr. 181:2-15, 174:16-175:16 (Feb. 13, 2025); see generally Notice of Filing of Status Conference Transcript, Ex. A., Hr‘g Tr. (Feb. 20, 2025) [ECF No. 511]. The Court informed the parties that it would enter the requested order granting final approval of the Disclosure Statement and confirmation of the Plan, with that order setting aside the issue of the Third-Party Releases for a separate subsequent written decision; that order was entered on February 20, 2025. See Findings of Fact, Conclusions of Law, and Order (I) Confirming the First Amended Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates and (II) Approving the Disclosure Statement on a Final Basis [ECF No. 500] (the “Confirmation Order“); see Notice of Filing of Status Conference Transcript, Ex. A., Hr‘g Tr. 21:18-25, 27:19-28:7 (Feb. 20, 2025).
BACKGROUND
I. Debtors’ Prepetition Business Operations and Bankruptcy Filing
The Debtors and their subsidiaries and affiliates (collectively, “Spirit“) operate as an ultra-low-cost carrier serving destinations throughout the United States, Latin America, and the Caribbean. See Cromer First Day Declaration ¶ 3.6 In November 2024, Spirit commenced proceedings under Chapter 11 of the Bankruptcy Code with the goal of implementing a comprehensive financial restructuring through a plan of reorganization. See id. ¶ 4.
The proposed restructuring is to be carried out in accordance with the RSA that was entered into by the Debtors and certain of their stakeholders (the “Consenting Stakeholders“).7 See id. Specifically, the RSA provides the framework for a series of restructuring transactions (the “Restructuring Transactions“) to be implemented through the Plan. These include: (a) a $300 million senior secured superpriority debtor-in-possession financing facility provided by certain of the Consenting Stakeholders, (b) the exchange of $700 million of Senior Secured Notes (as defined in the Plan) and $140 million of Convertible Notes (as defined in the Plan) for an exit secured notes financing, (c) equitization of the remaining Senior Secured Notes and Convertible Notes (approximately $795 million in the aggregate) in the form of new equity interests in the reorganized parent entity, (d) a fully backstopped equity rights offering through which the reorganized entities would raise $350 million of new equity interests to further support the reorganized balance sheet, and (e) an exit revolving credit facility. See Disclosure Statement Art. I.B; Confirmation Brief ¶ 6. The RSA contemplates that allowed priority claims and general unsecured claims against the Debtors will be paid in full or otherwise remain unimpaired (i.e., “ride through” the Debtors’ bankruptcy cases). See id. ¶ 8; Cromer First Day Declaration ¶ 4. The value needed to provide for full recovery by the unsecured creditors is being provided by the Consenting Stakeholders’ agreement to convert their debt to equity; without such agreement, it is undisputed that unsecured creditors would get nowhere near a full recovery in these cases. See Cromer Declaration
The RSA was entered into on November 18, 2024, prior to the Debtors’ bankruptcy filing. See Cromer First Day Declaration ¶ 54; Cromer First Day Declaration, Ex. B; see also Disclosure Statement, Ex. F. The RSA required each party to it to support the consummation of the Restructuring Transactions through the Plan. See Cromer First Day Declaration ¶ 54. A plan based on the RSA was filed on the Petition Date as “Exhibit A” to the RSA. See Cromer First Day Declaration, Ex. B. The Plan has remained essentially unchanged since its initial filing on the Petition Date, including the (i) unimpaired treatment of Classes 1, 2, 3, and 6, and (ii) impaired treatment of Classes 4 and 5, which include the Consenting Stakeholders who signed onto the RSA. Compare Cromer First Day Declaration, Ex. B at Ex. A, Art. III.A, with Plan Art. III.A.
II. Plan of Reorganization
The Plan divides those with claims against and interests in the Debtors into the following ten classes:
| Class | Claims or Interests | Status | Voting Rights |
|---|---|---|---|
| 1 | Other Secured Claims | Unimpaired | Deemed to accept |
| 2 | Other Priority Claims | Unimpaired | Deemed to accept |
| 3 | Prepetition Revolving Credit Facility Claims | Unimpaired | Deemed to accept |
| 4 | Senior Secured Notes Claims | Impaired | Entitled to vote |
| 5 | Convertible Notes Claims | Impaired | Entitled to vote |
| 6 | General Unsecured Claims | Unimpaired | Deemed to accept |
| 7 | Section 510(b) Claims | Impaired | Presumed to reject |
| 8 | Intercompany Claims | Unimpaired or Impaired | Deemed to accept or presumed to reject |
| 9 | Intercompany Interests | Unimpaired or Impaired | Deemed to accept or presumed to reject |
| 10 | Existing Interests | Impaired | Presumed to reject |
See Plan Art. III; Disclosure Statement Art. I.C; Cromer Declaration ¶ 6. The Plan
- Classes 1, 2, 3, and 6 are designated as “unimpaired” by the Plan. Each holder of a claim in these classes is conclusively presumed to have accepted the Plan and is not entitled to vote to accept or reject the Plan.
- Classes 4 and 5 are designated as “impaired” by the Plan. Each holder of a claim in these classes is entitled to vote to accept or reject the Plan. The Consenting Stakeholders are included in Class 4 (Senior Secured Notes Claims) and Class 5 (Convertible Notes Claims).
- Classes 8 and 9 are designated as either “unimpaired” or “impaired” by the Plan. If designated as unimpaired, the holders of such claims or interests are conclusively deemed to have accepted the Plan. If designated as impaired and receiving no distributions under the Plan (and retaining no interest in property), the holders of such claims or interests are presumed to have rejected the Plan. Whether designated as unimpaired or impaired, such holders are not entitled to vote to accept or reject the Plan.
- Classes 7 and 10 are designated as “impaired” by the Plan. Holders of claims or interests in these classes are deemed to have rejected the Plan and shall not receive distributions on account of their claims or interests. Such holders are not entitled to vote to accept or reject the Plan.
See Plan Art. III.C. Both Classes 4 and 5 voted overwhelmingly in favor of the Plan. Specifically, Class 4—Senior Secured Notes Claims—voted 100% in favor of the Plan, both by number and dollar amount of claims. See Declaration of Stephenie Kjontvedt of Epiq Corporate Restructuring, LLC Regarding the Solicitation and Tabulation of Ballots Cast on the Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates at Ex. A [ECF No. 452] (the “Kjontvedt Declaration“). Class 5—Convertible Notes Claims—voted 99.97% in favor by dollar amount and 95.56% in favor by number. See id.
The Plan also provides for the Third-Party Releases. Article VIII.F describes the Third-Party Releases as follows:
Except as otherwise specifically provided for in the Plan or Confirmation Order, on and after the Effective Date, for good and valuable consideration, including their cooperation and contributions to the Chapter 11 Cases, each Releasing Party shall be deemed to have conclusively, absolutely, unconditionally, irrevocably, and forever released and discharged the Released Parties from any and all claims, interests, obligations, debts, rights, suits, damages, Causes of Action, remedies, and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, asserted or unasserted, existing or hereinafter arising, in law, equity, or otherwise, whether for tort, fraud, contract, violations of federal, state, or other applicable laws, or otherwise, including Avoidance Actions, those Causes of Action based on veil piercing or alter-ego theories of liability, contribution, indemnification, joint liability, or otherwise that such Releasing Party would have been legally entitled to assert (whether individually or collectively) . . . .
Plan Art. VIII.F (emphasis added). A “Released Party” is defined in the Plan as:
(a) the Debtors; (b) the Reorganized Debtors; (c) each DIP Secured Party; (d) each Consenting Senior Secured Noteholder; (e) each Consenting Convertible Noteholder; (f) each Prepetition
Agent/Trustee; (g) each RCF Secured Party; (h) each Backstop Commitment Party; (i) the Distribution Agent; (j) any Committee and all members thereof; and (k) with respect to each of the foregoing Entities in clauses (a) through (j), such Entity‘s Related Parties; provided, however, that 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 shall not be considered a “Released Party” notwithstanding anything to the contrary herein.
Plan Art. I.A.168. Under the Plan, the Releasing Parties are limited to those creditors that are either (a) in an unimpaired class (Classes 1, 2, 3, and 6), or (b) in an impaired voting class (Classes 4 and 5), 98.1% of whom are Consenting Stakeholders that have already agreed through the RSA to grant the Third-Party Releases. See Cromer Declaration ¶ 38; see also Kjontvedt Declaration ¶ 11.9 The Plan defines a “Releasing Party” as:
(a) the Debtors and their Estates; (b) the Reorganized Debtors; (c) each DIP Secured Party; (d) each Consenting Senior Secured Noteholder; (e) each Consenting Convertible Noteholder; (f) each Prepetition Agent/Trustee; (g) each RCF Secured Party; (h) each Backstop Commitment Party; (i) each Holder of a Claim entitled to vote to accept or reject the Plan that does not affirmatively elect to “opt out” of being a Releasing Party by checking the appropriate box on such Holder‘s timely and properly submitted Ballot to indicate that such Holder elects to opt out of the Plan‘s release provisions; (j) each Holder of a Claim or Interest in a Nonvoting Class (with the exception of Holders of Existing Interests) that does not affirmatively elect to “opt out” of being a Releasing Party by checking the appropriate box on such Holder‘s timely and properly submitted Opt-Out Form to indicate that such Holder elects to opt out of the Plan‘s release provisions; and (k) with respect to each of the foregoing Entities in clauses (a) through (j), such Entities’ Related Parties; provided, that, for the avoidance of doubt, any opt-out election made by a Consenting Stakeholder (that has not terminated the Restructuring Support Agreement as to itself and remains a party thereto) in any capacity shall be void ab initio.
Plan Art. I.A.169 (emphasis added).
Under the procedures put in place by the Debtors, the Third-Party Releases apply to the affected creditors unless they elect not to consent (i.e., opt out) of the Third-Party Releases by submitting a form or ballot with a checked opt-out box, or by objecting to the Third-Party Releases. See Cromer Declaration ¶ 38; Kjontvedt Declaration ¶ 11. Specifically, creditors that were eligible to vote on the Plan could opt out of the Third-Party Releases by checking a separate box on a timely and properly submitted ballot. See Motion of the
Under the Plan, therefore, 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 property submit an Opt-Out Form with the opt-out box checked, or (iv) failed to timely and properly file an objection. See Disclosure Statement Motion ¶ 18 n.9.
Information regarding the Third-Party Releases and instructions on the procedures to opt out of them were featured prominently in the Plan and Disclosure Statement.10 See Plan Art. VIII.F; Disclosure Statement Art. I.C, I.D, I.F. This information also appeared on the ballots, the Unimpaired Claims Notice (as defined below), and the Combined Hearing Notice (as defined below).11 See generally Combined
Creditors in the impaired voting classes were sent an appropriate ballot for their class. See Disclosure Statement Motion ¶ 30; Disclosure Statement Order ¶ 20. These ballots included information regarding the Third-Party Releases, instructions on opting out of the Third-Party Releases, and a box to check in order to opt out of the Third-Party Releases.
A Notice of Unimpaired Status (the “Unimpaired Claims Notice“), was sent to creditors in the classes that were designated as unimpaired. See Disclosure Statement Motion ¶ 33; Disclosure Statement Order ¶ 21. The Unimpaired Claims Notice included information regarding the Third-Party Releases, instructions on opting out of the Third-Party Releases, and an “Opt-Out Form” with a box to check in order to opt out of the Third-Party Releases.
The deadline to opt out of the Third-Party Releases was January 21, 2025 at 5:00 p.m. See Kjontvedt Declaration ¶ 11. As of the deadline, 190 opt-out elections were received, five of which were received on paper versions of the Opt-Out Form, 166 of which were submitted through the online portal on the Case Information Website maintained by Epiq, and nineteen of which were received on ballots from voting creditors. See id. ¶ 12; see also Supplemental Declaration of Stephenie Kjontvedt of Epiq Corporate Restructuring, LLC Regarding the Solicitation and Tabulation of Ballots Cast on the Joint Chapter 11 Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates ¶ 5 [ECF No. 503] (the “Kjontvedt Supplemental Declaration“).
III. The Request for Confirmation and Objections
All objections and reservations of rights with respect to final approval of the Disclosure Statement and confirmation of the Plan have been resolved, except for the objections of the SEC and the UST.12 The Objectors’ opposition to confirmation raises one central question: whether the Third-Party Releases are consensual and appropriate. The UST argues that the opt-out mechanism contained in the Plan results in imposition of the Third-Party Releases without first obtaining the affirmative consent of the parties through an opt-in ballot and thus is in violation of the Supreme Court‘s ruling in Purdue Pharma, 603 U.S. 204 (barring imposition of nonconsensual third-party releases in Chapter 11 bankruptcy case). The SEC focuses more narrowly on the classes of noteholders entitled to vote under the Plan, arguing that the failure to return a ballot that opts out of the Third-Party Releases is insufficient evidence of consent. The Debtors counter that the Third-Party Releases are consensual and that the opt-out mechanism is an adequate manifestation of consent in the circumstances of the Debtors’ cases.
DISCUSSION
I. Legal Standard
In Purdue Pharma, the Supreme Court held that the Bankruptcy Code does not authorize nonconsensual third-party releases in Chapter 11 plans of reorganization, meaning the nonconsensual release of a creditor‘s claim against a non-debtor. See Purdue Pharma, 603 U.S. at 227 (“Confining ourselves to the question presented, we hold only that the bankruptcy code does not authorize a release and injunction that, as a part of a plan of
While holding that nonconsensual third-party releases are not permissible, the Supreme Court in Purdue Pharma made it clear that consensual third-party releases were not the subject of its decision. As the Supreme Court explained, “[n]othing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual releases at issue here.” Id. at 226 (citing In re Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993)). Not surprisingly then, the Supreme Court in Purdue Pharma expressly declined to discuss how parties may manifest their consent to third-party releases. See id. (“Nor do we have occasion today to express a view on what qualifies as a consensual release . . . “); see also In re Roman Cath. Diocese of Syracuse, 2024 Bankr. LEXIS 2807, at *5 (Bankr. N.D.N.Y. Nov. 14, 2024) (“Contention now lies in the method by which consent may be obtained, as the Supreme Court in Purdue Pharma specifically declined to define methods by which consent is achieved . . . .“).
Turning then to an issue not decided by Purdue Pharma, the Court first looks to the larger context for the Third-Party Releases contained in this Plan. A Chapter 11 plan is
the crucible by which the parties’ claims and rights in property dealt with by the plan are transformed and governed post-confirmation—a “super-contract“—not because it is signed by all the parties with claims against the debtor and holders of interests affected by the plan who participated in the case, but because of applicable provisions of the Bankruptcy Code and principles of res judicata.
Lawski v. Frontier Ins. Grp., LLC (In re Frontier Ins. Grp., Inc.), 585 B.R. 685, 693 (Bankr. S.D.N.Y. 2018). These applicable provisions of the Bankruptcy Code include Sections 1123 and 1124. Generally speaking,
Of particular interest here,
The Bankruptcy Code does not define what it means to “agree” under
Given this statutory framework, consensual third-party releases have been permitted in the Second Circuit. See Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2d Cir. 2005) (“Nondebtor releases may also be tolerated if the affected creditors consent.“) (citing In re Specialty Equip., 3 F.3d at 1047)); see also In re LATAM Airlines Grp. S.A., 2022 Bankr. LEXIS 1725, at *144 (Bankr. S.D.N.Y. Jun. 18, 2022) (“It is well settled that, as a general proposition, creditors may consent to third-party releases.“) (collecting cases); In re Avianca Holdings S.A., 632 B.R. 124, 133 (Bankr. S.D.N.Y. 2021) (“If third-party releases are consensual . . . ‘courts generally approve them unless they are truly overreaching on their
Against this background, we return to the central question: What does consent look like? In addressing this question, this Court does not write on a blank slate but instead looks to the existing case law in this District and Circuit. See In re Roman Cath. Diocese of Syracuse, 2024 Bankr. LEXIS 2807, at *6 (“In the absence of Supreme Court guidance, this Court looks to Second Circuit case law to determine the method by which consent may be established and whether silence or inaction can be deemed consent.“). Courts have been presented with two choices for showing consent: an opt-out and an opt-in. An opt-out provides that a third-party release will be effective as to each party who is sent a ballot or opt-out form that clearly explains that the ballot or opt-out form must be returned and the opt-out box checked if the party elects not to approve the third-party release. See In re Avianca Holdings, 632 B.R. at 137. An opt-in provides that no party (even a party voting in favor of the proposed plan) would be deemed to have granted a third-party release unless that party elected to submit a form that opted into a release, with that election being separate from that party‘s vote with respect to the plan. See In re Chassix Holdings, Inc., 533 B.R. 64, 77 (Bankr. S.D.N.Y. 2015).
II. Analysis of the Third-Party Releases Here
A. The Authority in This District
The Objectors’ view is that an opt-in mechanism is the only permissible way to manifest consent and that an opt-out is never appropriate. See, e.g., UST Objection at 1, 19 n.6. But this is not the view expressed by the majority of judges in this District. Decisions in this District generally permit use of an opt-out mechanism if the affected parties receive clear and prominent notice and explanation of the releases and are provided an opportunity to decline to grant them. In assessing the permissibility of an opt-out, courts also look to the circumstances of each case to determine whether consent exists.
In Avianca Holdings, for example, the court found an opt-out provision for a release to be “permissible provided that a clear and prominent explanation of the procedure is given[,]” consistent with federal bankruptcy cases in the Bankruptcy Court for the Southern District of New York and elsewhere. In re Avianca Holdings, 632 B.R. at 137. The court reasoned that the failure to opt out of releases would manifest consent to the releases where the ballot clearly explained the opt-out procedure and put affected parties on notice that their rights would be affected. See id. The Avianca court approvingly cited to another decision from the Southern District of New York, In re Cumulus Media Inc., Case No. 17-13381 (SCC) (Bankr. S.D.N.Y. 2018). In Cumulus Media, the court stated: “Inaction is action under appropriate circumstances. When someone is clearly and squarely told if you fail to act your rights will be affected, that person is then given information that puts them on notice that they need to do something or else. That‘s not a trap.” In re Cumulus Media Inc., Case No. 17-13381 (SCC), Hr‘g Tr. 27:7-11 (Bankr. S.D.N.Y. Feb. 1, 2018) [ECF No. 434]. Thus, the Avianca court concluded that “[i]f a creditor with a right to vote is sent a ballot that clearly explains that the ballot must be returned and the opt-out box checked if the creditor elects not to approve the third-party release, the release is effective as to that creditor.” In re Avianca Holdings, 632 B.R. at 138.13 In reaching its decision, the Avianca court also noted that the opt-out structure was consistent with the Supreme Court‘s authority on consent in the context of class action releases. See id. at 137 (noting the Supreme Court‘s approval of an opt-out structure where the plaintiff received notice and an opportunity to be heard, with such notice “reasonably calculated . . . to apprise interested parties of the pendency of the action and the afford them an opportunity to present their objections.“) (quoting Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985)). Applying all these principles, the Avianca court approved opt-out releases of (i) creditors who voted to accept the plan, (ii) unimpaired creditors and interest holders who had the opportunity to, but did not, opt out of the releases, and (iii) creditors who voted to reject the plan or abstained from voting and did not opt out of the releases. See In re Avianca Holdings, 632 B.R. at 133.14
Adopting the rationale in Avianca, the court in LATAM Airlines approved an opt-out structure because it was clearly and prominently noticed and explained. See In re LATAM Airlines Grp. S.A., 2022 Bankr. LEXIS 1725, at *146-47 (citing In re Avianca Holdings, 632 B.R. at 137). The LATAM court noted that “courts in this district routinely approve opt out release language in cases in which creditors and interest holders have been provided with a ‘clear and
prominent explanation of the [opt-out] procedure.’” Id. at *146 (citations omitted). In that case, the debtors had (i) included a discussion of the releases in the disclosure statement, (ii) included the full text, in bold typeface, of the releases, an explanation of the consequences of not opting out, and instructions for opting out in the notices of non-voting status and ballots, and (iii) offered multiple ways for a party to effect its opt-out. See id. at *147–49. Accordingly, the LATAM court found consent to the third-party releases by holders of claims and equity interests who (i) voted to accept the plan, (ii) rejected or abstained from voting on the plan and failed to opt out, and (iii) were presumed to accept the plan and failed to opt out. See id. at *143.
Other decisions in this District have analyzed a variety of other circumstances—beyond the clarity and prominence of the language used for the release—in assessing the propriety of an opt-out mechanism, including:
- the circumstances of the proposed releasing parties in the bankruptcy case, including whether these creditors
have any economic disincentive to follow the bankruptcy case, see In re SunEdison, Inc., 576 B.R. 453, 461 (Bankr. S.D.N.Y. 2017); In re Chassix, 533 B.R. 64, 79 (Bankr. S.D.N.Y. 2015); see also In re Emerge Energy Services LP, 2019 WL 7634308, at *18 (Bankr. D. Del. Dec. 5, 2019); - the procedural history of the bankruptcy case and whether the requested release has been clearly and consistently presented to the affected creditors, see, e.g., In re LATAM Airlines Grp., 2022 Bankr. LEXIS 1725, at *147; see also In re Washington Mut., Inc., 442 B.R. 314, 352–53 (Bankr. D. Del. 2011); and
- general principles of contract law, see In re SunEdison, Inc., 576 B.R. at 458 (explaining that courts look to general principles of contract law embodied in the Restatement of Contracts in deciding whether a creditor consents to a third-party release).
Numerous judges in this District have utilized these principles to approve opt-out releases in a variety of cases when appropriate given the facts and circumstances of each case. See, e.g., In re Stearns Holdings, LLC, 607 B.R. 781, 788 (Bankr. S.D.N.Y. 2019) (“[A]ffected parties were on clear notice of the Third-Party Releases, including the option to opt out of the Third-Party Releases, rendering such releases consensual, as this Court has held in prior casesinvolving similar facts and circumstances.”) (Judge Shelley C. Chapman); In re Ditech Holding Corp., 606 B.R. 544, 630 (Bankr. S.D.N.Y. 2019) (approving third-party consensual release with opt-out) (Judge James L. Garrity); In re Reader’s Dig. Ass’n, Inc., 2010 WL 11822562, at *11 (Bankr. S.D.N.Y. July 15, 2010) (approving third-party releases because releasing parties were given “notice and opportunity for hearing and opt out”) (Judge Robert D. Drain); In re Automotores Gildemeister SPA, Case No. 21-10685 (LGB), Hr’g Tr. 89:12–91:17 (Bankr. S.D.N.Y. May 27, 2021) [ECF No. 156] (holding at confirmation hearing that creditors manifested consent to releases when provided with notice of releases and an opt-out form) (Judge Lisa G. Beckerman); In re MatlinPatterson Glob. Opportunities Partners II LP, Case No. 21-11255 (DSJ), Hr’g Tr. 63:22–64:11 (Bankr. S.D.N.Y. Apr. 27, 2023) [ECF No. 888] (noting at disclosure statement hearing that opt-out mechanisms are regularly approved so long as the affected parties are given robust, clear, and adequate notice) (Judge David S. Jones).15
Given the weight of the authority in this Circuit, the Court concludes that the proposed Third-Party Releases here are consensual—and the proposed opt-out mechanism permissible—for several reasons. First, the Third-Party Releases here are clearly worded and prominently presented in all of the Plan materials, including the ballots and the Opt-Out Form itself. As such, the opt-out mechanism here is reasonably calculated to appraise interested parties of their rights in these bankruptcy cases. See In re Avianca Holdings, 632 B.R. at 137. Indeed, no party—including the Objectors—has argued that the language and presentation here was anything other than clear and fulsome. See Hr’g Tr at 52:9–11 (“[N]either the U.S. Trustee nor the SECobjected to the solicitation materials approved by this Court . . . .”); id. at 85:17–24 (“[T]his Court [received] no objection [to] the material that [] advised creditors multiple times [to opt out of the releases in order to preserve any included claims], including in bold and all caps.”); id. at 88:11 (“The Court approved the materials, they were clear . . . .”) (Feb. 13, 2025).18 Second, the history of these cases as to the proposed release has been clear and consistent. The Third-Party Releases have been consistently part of the proposed Plan here since the very beginning of the bankruptcy, and there have been no changes to the proposed releases that might serve to confuse any party. See Cromer Declaration ¶ 38 (explaining that the instructions for opting out were featured “prominently, conspicuously, and in plain English on the Ballots, Unimpaired Claims Notice, and Combined Hearing Notice[,]” all of which were publicly filed on November 26, 2024 as part of the Disclosure Statement Motion at ECF No. 115); see also Hr’g Tr. 63:8–11 (Feb. 13, 2025) (“We filed a plan on the first day of the cases that had this [opt out] mechanic in Technicolor for all to see. We gave full notice to everybody. Nothing ever changed.”); cf. In re Washington Mut., Inc., 442 B.R. 314, 345, 352–53 (Bankr. D. Del. 2011) (noting that the releases were modified just before confirmation). Third, these cases are not a situation where the affected parties have little or no economic incentive to pay attention to the bankruptcy, such as where a creditor is receiving no recovery or a de minimus one. Since the beginning, the proposed releasing parties here have all been promised a full or substantial recovery and have had every incentive to follow the case to see if the promised recoveries come to fruition. Those recoveries are based upon the agreement struck by the Debtors with the Consenting Stakeholders and that agreement is embodied in the Plan, which includes the proposed Third-Party Releases.
See Cromer Declaration ¶ 38 (noting that unimpaired classes’ recovery is in large part due to the proposed equitization of debt and the DIP and equity financing being provided by the Consenting Stakeholders). The only impaired creditors here are those parties who are subject to the RSA, which has overwhelming support. See id. (explaining that 98.1% of holders in the impaired voting classes already agreed in, and are bound by, the RSA to grant the releases); Debtors’ Reply in Further Support of Final Approval of the Disclosure Statement and Confirmation of the First Amended Joint Plan of Reorganization of Spirit Airlines, Inc. and Its Debtor Affiliates ¶ 2 [ECF No. 454] (the “Debtors’ Reply”) (noting only approximately 2% of Spirit’s impaired creditors had not previously consented by contract to the releases in the RSA); Hr’g Tr. 49:14–15 (Feb. 13, 2025) (explaining that “ninety-eight percent of all impaired creditors consented in writing by contract to the releases.”).19
Several additional observations should be made in parsing these Third-Party Releases. Not all of the releasing parties have the same set of circumstances, making the Court’s task here more nuanced than the blunderbuss approach advocated in the UST Objection. See generally UST Objection (arguing that an opt-in mechanism is the only appropriate way to manifest “express consent” for any and all the releasing parties, including even the parties who signed the RSA); see also Hr’g Tr. 109:24–25, 110:1–2, 133:13–16, 18–21 (Feb. 13, 2025) (UST arguing that the “clearest way to know that creditors have manifested the maximum amount of consent” is to provide an opt-in mechanism for all the parties, including those who signed onto the RSA). Ignoring the factual distinctions among the various classes of creditors here, the UST providedno justification in its Objection or at oral argument for disregarding the clear consent manifested by the creditors who signed onto the RSA.20 In fact, the Court
ballots have been returned, most of which were submitted using an online portal set up by the Debtors. See Hr’g Tr. 49:20–21, 89:23–24 (Feb. 13, 2025); Kjontvedt Supplemental Declaration ¶ 5. Indeed, the additional option of an online portal makes it easier for creditors to make their views known, a factor also favoring the Third-Party Releases.
The decision on the proposed Third-Party Releases is most difficult for non-voting parties: creditors who were deemed to accept the Plan (and thus did not have the right to vote) and those who chose not to vote on the Plan despite having that option. Courts have struggled the most with this circumstance and reached a variety of conclusions. But considering all the circumstances here and the weight of the case law, the Court concludes that the opt-out procedure is appropriate for these creditors here. The Court bases its conclusion on the analysis above of the circumstances here, including a clear and prominent vehicle for opting out, the consistent presentation of the Third-Party Releases during the case, and the clear economic stake in these proceedings for all those affected creditors. The Court also notes the well-publicized nature of these bankruptcy cases as the seventh largest airline in the United States, and the fact that no concerns as to the Third-Party Releases were raised by the Committee, which represents all unsecured creditors (and thus all of the classes of creditors who are being asked to provide the Third-Party Releases).
there was an official committee representing the interests of unsecured creditors who were being asked to provide a release).24
The Objectors rely on the Chassix decision to argue that an opt-out mechanism is not an appropriate way for creditors to manifest consent to a third-party release. In re Chassix, 533 B.R. 64. But to understand the significance of Chassix here, one needs to parse the specific circumstances of that case. As a threshold matter, the Chassix court concluded that creditors who voted to accept the plan were deemed to consent to the third-party releases in the plan. See id. at 79–80 (finding a vote in favor of the plan to be consent to the release in the plan absent evidence of coercion). While the Chassix court rejected the releases for creditors who voted to reject the plan or were deemed to reject the plan (and did not vote), it reached those conclusions based on the facts in that case. See id. at 80. Those circumstances included a small pro rata recovery in the cases, changes to the plan shortly before the voting deadline, and the widely publicized fact that other creditor groups had endorsed the proposed plan. See id. The Chassix court concluded that all these circumstances together “could easily have prompted an even higher than usual degree of inattentiveness or inaction among affected creditors in these cases.” Id. By contrast here, the circumstances are different: the affected creditors are receiving substantial recoveries (most full recoveries) based on the agreement struck before these cases were filed; creditors’ treatment (including the proposed releases) has remained unchanged since the beginning of these cases so there is little prospect for confusion; and there is no publicity surrounding the case that would suggest a heightened degree of inattentiveness. See id. at 79 (noting that “circumstances may justify a different approach in different cases.”). Indeed, the
Plan here provides one measure of extra protection beyond that found in Chassix because the opt-out mechanism here allows creditors to withhold their consent to the releases even if they wish to vote in favor of the Plan. This is an important fact considering the likelihood of creditor support for the Plan given the substantial recovery here.25
was to vote against the plan. By contrast, the Debtors here have included an opt-out mechanism for all voting creditors regardless of whether they voted in favor of or against the Plan, thus allowing affected creditors to reflect their views separately on the Plan and on the Third-Party Releases. Second, the affected creditors here are all receiving a substantial recovery—with most being fully paid—thus removing any concern about incentivizing inaction based on a meager recovery. Third, the Plan here does not propose any release for parties deemed to reject the Plan, thus avoiding any concern about the incentive of such parties to act given their lack of any recovery in these cases. See id. at 461.26
B. The Authority Outside This Circuit
The result here is also supported by authority outside this Circuit. Since Purdue Pharma, the majority of courts outside this jurisdiction have permitted an opt-out mechanism for a consensual release given circumstances similar to those presented here. For example, the court in Lavie Care Centers was recently confronted
Likewise, the Bankruptcy Court for the Southern District of Texas has approved the use of an opt-out mechanism for a consensual release. For example, the court in Robertshaw US Holding Corp. approved an opt-out release, stating that Purdue Pharma had left consensual
releases untouched and noting that prior case law in that district had approved consensual third-party releases with an opt-out feature. The court explained:
[T]he consensual third-party releases in the Plan are appropriate, afforded affected parties constitutional due process, and a meaningful opportunity to opt out. There is nothing improper with an opt-out feature for consensual third-party releases in a chapter 11 plan . . . . And what constitutes consent, including opt-out features and deemed consent for not opting out, has long been settled in this District . . . . Hundreds of chapter 11 cases have been confirmed in this District with consensual third-party releases with an opt-out. And, again, Purdue did not change the law in this Circuit.
In re Robertshaw US Holding Corp., 662 B.R. 300, 323 (Bankr. S.D. Tex. 2024) (citations omitted).
The Objectors rely on several cases outside the Second Circuit that are distinguishable from the facts here. For example, the Objectors cite In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011) for the proposition that a third-party release using an opt-out mechanism cannot be imposed on those who do not vote on the plan in a case. See UST Objection at 19, 21; SEC Objection ¶ 12. But the facts of Washington Mutual raised serious concerns that are not present here. In Washington Mutual, voting creditors could opt out of the third-party releases by checking a box, but the plan, as originally drafted, also separately provided that those parties who purportedly opted out would still be bound by the releases and would receive the distributions afforded to their respective classes. See In re Washington Mutual, 442 B.R. at 351. To compound the problem, the debtors modified the plan just one week before confirmation—and after the voting deadline—to provide that no releases would be granted by any entity that opted out, but that any entity that opted out would not be entitled to a distribution. See id. at 352, 354. Given these contradictory and confusing facts, the court did not approve the releases. The Washington Mutual court first found that “the original language in the Plan that would mandate third-party releases even in the place of an indication on the ballot thatthe party did not wish to grant the release would not pass muster.” Id. at 352. Given the last minute material revisions to the releases, the Washington Mutual court also found the opt-out mechanism to be insufficient with respect to parties who did not return a ballot or were not entitled to vote at all. See id. at 355. The court concluded that “any third-party release is effective only with respect to those who affirmatively consent to it by voting in favor of the Plan and not opting out of the third party releases.” Id.
By contrast here, the Debtors have not made any material or last-minute changes to the Plan or Third-Party Releases that might create confusion. See Debtors’ Reply ¶ 25. Second, the Plan does not contain any provisions that would override a party’s opt-out election or mandate that a party who opts out of the release does so at the expense of receiving a distribution. See id. By contrast here, the decision of an affected creditor on the releases is separate and distinct from his or her right to vote on the Plan and to receive a distribution. It is noteworthy that the same judge who curtailed the releases in Washington Mutual has subsequently approved the use of an opt-out mechanism for a consensual release in a variety of cases that did not present the profound flaws found in Washington Mutual. See, e.g., In re Homer City Generation, L.P., Case No. 17-10086 (MFW) (Bankr. D. Del. Feb. 15, 2017) [ECF No. 157] (finding claimants in voting classes manifested consent to releases by failing to check the opt-out box on their ballot, and non-voting classes manifested consent by not objecting to the releases); see also In re EYP Group Holdings, Inc., Case No. 22-10367 (MFW) (Bankr. D. Del. Nov. 1, 2022) [ECF No. 568] (same); In re Clarus Therapeutics Holdings, Inc., Case No. 22-10845 (MFW) (Bankr. D. Del. Feb. 9, 2023) [ECF No. 320] (same).
The UST also relies on opt-out provisions recently rejected in In re Lumio Holdings, Inc., Case No. 24-11916 (JKS). See UST Objection at 19–20. In Lumio, the court required use of anopt-in mechanism for impaired classes to grant third-party releases because the projected recovery for two impaired classes was zero, and the recovery for the impaired general unsecured creditor class was unknown. See In re Lumio Holdings, Inc., Case No. 24-11916 (JKS), Hr’g Tr. 24:1–25:5 (Bankr. D. Del. Jan. 3, 2025) [ECF No. 428]. But once again, the circumstances here are quite different with all affected creditors receiving a substantial recovery, and general unsecured creditors receiving 100% distributions
Rather than providing blanket support for the Objectors’ position, the Washington Mutual, Lumio, and Emerge Energy cases also demonstrate the need to evaluate third-party releases based on the unique facts and circumstances of the case at issue including the clarity of the language used, the history of the case, and the incentive for the affected creditors to engage in the bankruptcy case.
Finally, the Objectors rely on the thoughtful discussion of releases in In re Smallhold, Inc., 665 B.R. 704 (Bankr. D. Del. 2024). In that case, the court found that creditors who voted on the plan—regardless of how they voted—were deemed to consent to the third-party release in the plan. See id. at 723–25. But the court also found that parties that did not have the opportunity to vote on the plan could not be found to consent to the third-party release, notwithstanding the ability to opt out. See id. at 717–23. The court found that its own prior approval of such an opt-out release rested upon a “default” theory, namely the possibility that a nonconsensual release could be imposed on an objecting creditor who did not act. See id. at 708–09, 717–23. With such relief available before the decision in Purdue Pharma, the theory goes, it was permissible to require a creditor to act through an opt-out mechanism to avoid the imposition of a third-party release by default; with a nonconsensual release no longer permissible after Purdue Pharma, the Smallhold court found that consent could no longer be imposed through an opt-out mechanism. See id. at 708–09, 716–19 (discussing its prior decision in In re Arsenal Intermediate Holdings, LLC, 2023 WL 2655592 (Bankr. D. Del. Mar. 27, 2023)).
In any event, the court in Smallhold did not go as far as the Objectors seem to suggest. The court caveated its decision in several ways that are relevant here. It noted that, even if such third-party releases “may be imposed in an appropriate case, the argument for such a release is not sufficiently developed by the parties here to warrant its imposition.” Id. at 710. By contrast, the Court here has been presented with a fulsome record as to the basis for the Third-Party Releases. The Smallhold court also did not hold that consent was governed by state law rather than federal law—the stance of the Objectors
C. The Restatement of Contracts
The UST argues that the Court must follow state law in determining whether the Third-Party Releases are consensual and notes that “ordinary choice of law principles govern which state’s law applies to contracts between non-debtors . . . .” UST Objection at 9 n.4.30 Instead of offering further insight on this issue, however, the UST “assert[s] no position as to choice of law” and relies almost exclusively on the Restatement (Second) of Contracts. Id. But as the discussion above makes clear, the question about whether a creditor has agreed to certain treatment is a matter of federal bankruptcy law, with an already existing and well-developed body of case law on consent in the context of a collective bankruptcy proceeding. See supra Section I.A. It is true that federal courts analyzing the issue of consensual releases in bankruptcy cases have looked to, among other things, the principles contained in the Restatement of Contracts. See, e.g., In re SunEdison, 576 B.R. at 459 (citing Restatement (Second) of Contracts § 69). But the Restatement of Contracts “itself is not the law anywhere” and it does not provide a solution on the choice of law if state law governed here. In re Lavie Care Ctrs., 2024 Bankr. LEXIS 2900, at *34.31
- Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.
- Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.
- Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
Restatement (Second) of Contracts § 69(1).32 These exceptions support the result here in several ways.
The first exception noted by the Restatement is “where an offeree has taken a benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.”33 Restatement (Second) of Contracts § 69(1)(a); see also Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004) (“It is standard contract doctrine that when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit with knowledge of the terms of the offer, the taking constitutes an acceptance of the terms, which accordingly become binding on the offeree.” (citing Restatement (Second) of Contracts § 69(1)(a))).
The Objectors argue that the Third-Party Releases do not provide the Releasing Parties with a “benefit,” and that each Third-Party Release is a separate bilateral contract entirely unrelated to the Plan; they posit that such a release can only be consensual if separate consideration is provided outside the Plan. But the Objectors’ view is divorced from the reality here. The Third-Party Releases are a term in the Plan that provides the value to the affected creditors. As such, the Court believes it is more appropriate to examine the consent question in the larger framework of the benefits being provided through the financial restructuring contained in the Plan. As previously noted, the Plan is the “contract” that is at issue during the confirmation process, and it includes the voluntary Third-Party Releases, which are an integrated part of the Plan and not an unsolicited offer that is being given for no consideration.36
This exception is clearly met for (1) those creditors that signed the RSA, and (2) those creditors that voted on the Plan and did not opt out of the Third-Party Releases. Those creditorsthat signed the RSA have agreed in writing to the Third-Party Releases, a clear manifestation of intent to be bound to the Third-Party Releases. The Court also finds that creditors entitled to vote who returned a ballot but
The Debtors also argue that this second exception applies to the remaining affected creditors that failed to return a ballot or return an Opt-Out Form. The Debtors contend that they have provided all creditors, including these non-voting creditors, with reason to understand that assent may be manifested by silence or inaction and that the solicitation materials distributed by the Debtors provided several simple and accessible mechanisms for creditors to manifest their consent or lack thereof to the Third-Party Releases. See Restatement (Second) of Contracts § 19 (1981) (“manifestation of assent may be made wholly or partly by written or spoken words or by
other acts or by failure to act. . . .”) (emphasis added); see also id., cmt. a (“Purely negative conduct is sometimes, though not usually, a sufficient manifestation of assent.”).37
But the application of this exception to the non-voting creditors here is tricky, lest the exception swallow the rule. The comments to the Restatement mention one limiting principle by noting that it is the offeree’s intent—or lack thereof—that will determine whether the offeree’s silence constitutes acceptance. See Restatement (Second) of Contracts § 69, cmt. c (illustrations).38 Federal courts discussing the significance of silence have invoked other principles, with one court noting that “[t]he duty to speak need not be purely legal, but may be based on principles of ethics and good faith.” In re Teligent, Inc., 282 B.R. 765, 771–72 (Bankr. S.D.N.Y. 2002) (citing Columbia Broad. Sys. v. Stokely–Van Camp, Inc., 522 F.2d 369, 378 (2d Cir. 1975) (discussing New York law of
unique moral and ethical concerns because each creditor’s action may affect the rights of every party in interest.” In re Teligent, 282 B.R. at 771.
Ultimately, the Court does not need to decide if the releases for the non-voting creditors would be permissible based solely on the second exception given the Court’s conclusions above that consent exists as to these creditors under applicable federal bankruptcy law. See supra Section II.B; cf. In re Smallhold, 665 B.R. at 711, 723 n.57, 725 (leaving for another day the question of whether state law governs the question of consent).
Finally, there is a basis to argue that, at least for some creditors, the third exception applies “where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.” Restatement (Second) of Contracts § 1(c); see also Russell, 166 A.D.2d at 15 (silence will be deemed acquiescence where under duty to speak through course of conduct). These can include “[e]xplicit statement by the offeree, usage of trade, or a course of dealing between the parties” that “may give the offeror reason to understand that silence will constitute acceptance.” Restatement (Second) of Contracts § 69, cmt. d. “Under Subsection (1)(c) the offeree’s silence is acceptance, regardless of his actual intent, unless both parties understand that no acceptance is intended.” Id. The exception will generally apply where there is an ongoing course of conduct. See Albrecht Chem. Co. v. Anderson Trading Corp., 298 N.Y. 437, 440–41 (1949) (silence can operate as acceptance where “the parties may have been advised and warned by a previous course of dealings that inaction would be taken as assent.”). This exception clearly applies to the Consenting Stakeholders who signed onto the RSA after extensive negotiations.39
CONCLUSION
For the reasons stated above, the Third-Party Releases and opt-out mechanism in the Plan are approved. The Debtors should settle an order on five days’ notice that is consistent with the terms of the Confirmation Order.40 The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Files docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon the Objectors.
Dated: White Plains, New York
March 7, 2025
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
Notes
RSA § 5.03(b).[E]ach Consenting Stakeholder agrees . . . that it shall . . . (i) to the extent it is permitted to elect whether to opt out of the releases set forth in the Plan, elect not to opt out of such releases and (ii) to the extent it is permitted to elect whether to opt in to the releases set forth in the Plan, elect to opt in to such releases, in each case by delivering its duly executed and completed ballot(s) indicating such election prior to the deadline for such delivery. . . .
Plan, Art. I.D. Debtor Spirit Airlines, Inc. is incorporated in Delaware, while the remaining Debtors are Cayman Islands exempted companies incorporated with limited liability. See Disclosure Statement, Art. II.A.1, II.B.2.Unless a rule of law or procedure is supplied by federal law (including the Bankruptcy Code and the Bankruptcy Rules), or unless otherwise specifically stated, the laws of the State of New York, without giving effect to the principles of conflict of laws (other than section 5-1401 and section 5-1402 of the New York General Obligations Law), shall govern the rights, obligations, construction, and implementation of the Plan, any agreements, documents, instruments, or contracts executed or entered into in connection herewith (except as otherwise set forth in those agreements, in which case the governing law of such agreement shall control), and corporate governance matters, without giving effect to conflict of laws principles; provided, however, that corporate governance matters relating to the (Reorganized) Debtors not incorporated in New York shall be governed by the laws of the state or other jurisdiction of incorporation of the applicable (Reorganized) Debtor.