SDNY Bankruptcy Court holds that “opt-out” mechanism renders third-party releases consensual in Spirit Airlines chapter 11 plan

The US Bankruptcy Court for the Southern District of New York (the Court) recently approved third-party releases contained in a chapter 11 plan (the Plan) and found that, under the facts and circumstances, the opt-out mechanism used in the Plan rendered the releases consensual. In re Spirit Airlines, Inc., Case No. 24-11988 (March 7, 2025).

In so doing, the Court overruled objections filed by the Office of the United States Trustee (UST) and the US Securities and Exchange Commission (SEC) contending that the releases ran afoul of the Supreme Court ruling in Harrington v. Purdue Pharma L. P., 144 S. Ct. 2071 (2024).

The Spirit Airlines ruling is the latest development in the evolving landscape for third-party releases in the aftermath of Purdue Pharma.

Factual background

Spirit Airlines and its affiliates (collectively, Spirit) operate an ultra-low-cost air carrier serving various destinations in the United States, the Caribbean, and Latin America. Spirit commenced bankruptcy cases under chapter 11 of the US Bankruptcy Code (Bankruptcy Code) on November 18, 2024 (the Petition Date) to implement a comprehensive restructuring in accordance with the terms of a restructuring support agreement (RSA) by and among Spirit and its affiliated debtors (collectively, the Debtors) and certain of their stakeholders defined as the “Consenting Stakeholders.” The Consenting Stakeholders collectively held approximately 80 percent of the debt to be restructured under the Plan and more than two-thirds in amount of each of the voting classes established by the Plan. The Debtors filed the Plan and a disclosure statement (the Disclosure Statement) on the Petition Date.

As of the Petition Date, the Debtors’ capital structure included approximately $1.635 billion of outstanding funded debt, comprising $1.11 billion of outstanding Senior Secured Notes, $25.1 million of outstanding 2025 Convertible Notes, and $500 million of 2026 Convertible Notes, along with secured revolving credit facility claims, other secured claims, priority claims, general unsecured claims, and claims subject to subordination under Bankruptcy Code section 510(b).

As set forth in the RSA, the Debtors’ cases would be funded by a $300 million senior secured superpriority debtor-in-possession facility provided by certain of the Consenting Stakeholders. The Debtors proposed to implement the “Restructuring Transactions” contemplated by the RSA and the Plan by:

• Exchanging $700 million of Senior Secured Notes and $140 million of Convertible Notes for the Exit Secured Notes Financing


• Equitizing the remaining Senior Secured Notes and Convertible Notes (approximately $795 million in aggregate) in exchange for the New Common Equity in the Reorganized Company


• Providing a fully backstopped equity rights offering through which the Reorganized Debtors would raise $350 million of New Common Equity to further support the reorganized balance sheet


• Implementing a Management Incentive Plan (MIP) to be adopted by the new board, which will provide for the grants of equity and equity-based awards (in the form of MIP interest, which may equal up to 10 percent of New Equity Interests) to employees, directors, consultants, and other service providers of the Reorganized Debtor(s), as determined at the discretion of the New Board, and


• Entering into a new Exit Revolving Credit Facility.

Notably, the Plan provided for payment in full of general, unsecured creditors, with such full recovery only available because the Consenting Noteholders had contributed “hundreds of millions of dollars” in value through the Restructuring Transactions.

Third-party releases and the opt-out provision

A key feature of the Plan was the proposed third-party release provision, pursuant to which creditors were required to affirmatively opt out of the releases or be bound by them. According to the Plan and the Confirmation Order,

[F]or 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 …

* * *

based on, relating to, or in any manner arising from, in whole or in part … the Debtors or their non-Debtor Affiliates (including the management, ownership, or operation thereof or the issuance of Securities thereby), the Reorganized Debtors, the Chapter 11 Cases, the Debtors’ in- or out-of-court restructuring efforts [and various other potential claims related thereto].

Plan, Article VIII.F.

“Releasing Party” was defined to include:

(i) [E]ach 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”; and

(ii) [E]ach 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.” Plan, Article I.A.168.

“Released Party” was 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.167.

The Plan and the Disclosure Statement prominently featured instructions on the procedures to opt out of the third-party releases (eg, as set forth above in (i) and (ii) or by filing a Plan objection with the Court).

Creditors entitled to vote overwhelmingly approved the Plan; 190 of those creditors opted out of the third-party releases

The deadline to object to the Plan and opt out of the third-party releases was January 21, 2025 at 5 pm ET. As of the objection deadline, the Debtors’ claims and solicitation agent (Epiq) had received 190 opt-out elections, including 166 submitted through the online portal maintained by Epiq, 19 submitted on ballots from voting creditors and 5 paper versions of the opt-out form.

Creditors entitled to vote overwhelmingly supported the Plan and the third-party releases. The two impaired classes voted overwhelmingly in favor of the Plan, with 100 percent of the Senior Secured Note Claims (both by dollar amount and number of claims) and 99.97 percent in dollar amount and 95.56 percent by number of claims of the Convertible Note Claims each voting to accept.

On December 20, 2024, the Court entered an order conditionally approving the Disclosure Statement and scheduling a combined hearing on final approval of the Disclosure Statement and confirmation of the Plan for January 29, 2025.

The UST and SEC file plan objections

Prior to the hearing on confirmation of the Plan, the Debtors had resolved all Plan objections from creditors; the only remaining objections were those of the SEC and the UST which focused on the third-party releases (together, the Objections). Specifically,

• The UST argued that the Plan’s opt-out mechanism imposes the third-party releases without obtaining affirmative consent (as would be the case with an opt-in ballot) and thus was impermissible under Purdue Pharma, and


• The SEC argued that the third-party releases were nonconsensual (and thus impermissible under Purdue Pharma) because they would be imposed on creditors if they failed to return a ballot with a checked opt-out form.

In other words, the SEC posited that failure to return a ballot that opts out of the third-party releases “is insufficient evidence of consent to a third-party release.”

Confirmation hearing

The Court held a hearing on February 13, 2025 to consider final approval of the Disclosure Statement and confirmation of the Plan. Following the hearing, the Court indicated it would grant final approval of the Disclosure Statement and confirm the Plan, while reserving ruling on the issue of the propriety of the third-party releases.

The Purdue Pharma standard

The Supreme Court’s ruling in Purdue Pharma established that the Bankruptcy Code does not permit nonconsensual third-party releases under a Chapter 11. The Supreme Court excluded from that ruling any discussion with respect to consensual third-party releases, noting that nothing “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.” See Opinion at 14-15 (quoting Purdue Pharma, 603 US at 226.) (emphasis added). The Purdue Pharma ruling thus expressly declined to address how parties might manifest their consent to third-party releases.

Memorandum decision on releases

On March 10, 2025, the Court issued its memorandum decision holding that the third-party releases were consensual and that the proposed opt-out mechanism was permissible.

The Court began its analysis by noting that although the Supreme Court in Purdue Pharma had ruled that nonconsensual third-party releases are impermissible, the Purdue Pharma ruling did not address consensual third-party releases or opine on what constitutes consent. The Court therefore looked to cases within the Second Circuit that approved consensual third-party releases; the central question before the Court, therefore, was “whether the third-party releases were consensual and appropriate.”

In order to determine what is required to constitute “consent,” the Court surveyed existing case law from the Southern District of New York (SDNY) and the Second Circuit. The Court noted that two mechanisms had been used for parties to express consent: (i) an opt-out, which requires a party to complete and return a ballot or opt-out form checking a box indicating the party does not approve the third-party release; and (ii) an opt-in, which requires a party to complete and submit a ballot or other form affirmatively agreeing to be bound by a third-party release.

The Court noted that the Objections improperly advanced the view that an opt-in mechanism constituted the only valid means of expressing consent, and that use of an opt-out mechanism is “never appropriate.” The Court rejected that narrow view, observing that a majority of courts in the 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.” The Court added that “[i]n assessing the permissibility of an opt-out, courts also look to the circumstances of each case to determine whether consent exists.”

By way of illustration, the Court looked to the holding by a bankruptcy court in the district in In re Avianca Holdings. In that case, the court ruled that for an opt-out provision to be permissible, “a clear and prominent explanation of the procedure” must be provided. The Avianca Holdings court reasoned that if the ballot clearly explained the opt-out procedure and provided notice to the parties that their rights would be impacted, the failure to opt-out would manifest consent to the releases.

The Court noted that the bankruptcy court utilized a similar approach in the Latam Airlines chapter 11 case. There the bankruptcy court opined 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.’”

Finally, the Court found that other decisions from the SDNY examined additional circumstances (beyond the prominence and clarity of the explanation of a third-party release) in evaluating the permissibility of a third-party release, including:

• The circumstances of the proposed releasing parties in the bankruptcy case


• The procedural history of the bankruptcy case and whether the requested release has been clearly and consistently presented to the affected creditors, and


• The general principles of contract law.

In light of the foregoing case law, the Court upheld the third-party releases as consensual based on the following factors:

• First, the terms of the third-party releases were clear and unambiguous and prominently presented in the Plan solicitation materials.


• Second, the third-party releases were part of the Plan from the beginning of the case, and there had been no changes to the releases that might confuse any party.


• Third, proposed releasing parties had strong economic incentives to follow developments in the bankruptcy case, as they stood to receive a full or substantial recovery under the Plan, further supporting approval of the releases.

The Court also noted that numerous post-Purdue Pharma rulings from other districts approved opt-out mechanisms as consensual releases. The Court distinguished the cases on which the SEC and UST relied, based largely on the fact that general unsecured creditors in those cases were projected to receive little or no recovery. Those cases, the Court ruled, underscore “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.”

The Court also rejected the UST’s reliance on the Restatement (Second) of Contracts for the proposition that silence in the face of an offer will not operate as an acceptance.

The Court addressed this argument by explaining that the Restatement specifically identifies three circumstances where silence and inaction will operate as an acceptance:

1. 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.


2. 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.


3. Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if they do not intend to accept.

The Court applied these circumstances to the instant case to support the third-party releases. First, the creditors, who asked to provide the third-party releases, had reason to know that the note holders whose claims were modified by the Plan had provided hundreds of millions of dollars of value under the Plan, in consideration for the third-party releases. This value, the Court found, inured to the benefit of the releasing parties and thus constituted “an integrated part of the Plan and not an unsolicited offer that is being given for no consideration.”

Second, the Court noted that under the Restatement, the Debtors had clearly indicated in multiple documents and notices that a creditor’s failure to opt out or file an objection constituted consent to the third-party releases. The Court concluded, however, that it did not need to rely on this second exception, based on its earlier conclusion that the non-responding parties had consented.
Third, the Court stated that there was a basis to argue that the third exception applied based on the course of dealings between the parties, which made it reasonable for the offerees to notify the Debtors if they did not intend to consent to the third-party releases.

The Court also addressed decisional authority from outside the Second Circuit, and noted that, post-Purdue Pharma, a majority of courts have permitted consensual third-party releases with an opt-out mechanism. The Court distinguished several cases cited by the UST, including what the Court characterized as the “thoughtful” decision in In re Smallhold, Inc. The Court explicated that the Smallhold ruling was centered on a default theory, namely that because, post-Purdue Pharma, nonconsensual third-party releases were no longer permissible, and that result could not be attained by a party’s “default,” ie, a failure to opt out.

The Court rejected the Smallhold court’s reasoning, noting that “there is no decisional authority in this Circuit or District that such a default theory was ever the basis for a consensual release prior to the Supreme Court’s decision in Purdue Pharma.” The Court therefore declined to follow Smallhold and concluded that “the third-party releases here are anchored in the agreement with the Consenting Stakeholders that forms the foundation of the reorganization accomplished by the Plan and that provides the basis for the robust recovery of the affected creditors.”

Based on this thorough analysis, the Court approved the third-party releases and the opt-out mechanism contained in the Plan.

Key takeaways of Spirit Airlines

The Spirit Airlines ruling provides significant guidance on how courts may evaluate opt-out mechanisms for third-party releases in the aftermath of Purdue Pharma. The ruling endorses the argument that third-party releases subject to an opt-out mechanism can be consensual and is instructive for parties seeking to implement a chapter 11 plan containing such releases.

For more information

If you have any questions about this ruling or any restructuring-related matter, please contact the authors, Robert Klyman and Scott C. Shelley, or your usual DLA Piper contact.