Confirming the chapter 11 plan for Spirit Airlines, Bankruptcy Judge Sean Lane of New York wrote an opinion that could be read to mean that the Supreme Court’s Purdue decision in June did not affect pre-existing authority in the Southern District of New York allowing so-called opt-out plans to confer releases on nondebtors.

The March 7 decision by Judge Lane differs from the Smallhold opinion by Delaware’s Bankruptcy Judge Craig T. Goldblatt, who excised releases from creditors who did not vote and were not given a chance to opt out. However, Judge Goldblatt allowed releases to be given by creditors who voted for or against the plan, if they did not opt out. In re Smallhold Inc., 665 B.R. 704 (Bankr. D. Del. Sept. 25, 2024). To read ABI’s report, click here.

The Opt-Out Plan

The debtor negotiated a “prepackaged” chapter 11 plan. Among other things, the plan converted $800 million of notes into new equity, included a $350 million backstopped equity offering, was financed in part by a new revolving credit facility, and paid priority and unsecured claims in full or left them unimpaired.

Senior noteholders were impaired by the plan but voted 100% in favor of the plan. In another impaired class, holders of convertible notes voted 95.5% in number and almost 100% in amount in favor of the plan. Naturally, existing equity interests were extinguished and deemed to have rejected the plan.

Judge Lane had held a confirmation hearing and entered an order on February 20 confirming the plan. He found that the plan satisfied the requirements for confirmation. However, he left open the question of whether the plan’s nondebtor releases were permissible following the Supreme Court’s decision in Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report on Purdue, click here.

In his March 7 opinion, Judge Lane explained why the opt-out plan was permissible after Purdue.

SEC and U.S. Trustee Alone Object

The plan contained releases in favor of the major nondebtor players in the reorganization. With the opportunity to opt out, the plan contained releases binding unimpaired creditors along with the impaired senior and convertible noteholders. Notably, 98.1% of the senior and convertible noteholders had consented in writing to the releases by having signed the restructuring support agreement negotiated before filing.

Simplified, the plan provided that creditors would have consented to the nondebtor releases by (1) voting for or against the plan without checking the opt-out box on the ballot, (2) abstaining from voting but not checking the opt-out box, or (3) failing to submit a form with the opt-out box checked. Judge Lane said that 190 opt-out elections had been received.

The only objections to the releases came from the U.S. Trustee and the Securities and Exchange Commission. The U.S. Trustee took the position that Purdue requires affirmative consent. The SEC took a narrower approach by contending that the failure to return a ballot not was evidence of consent.

Almost All Impaired Creditors Had Written Consents

Addressing the objections, Judge Lane began by saying that “Purdue Pharma made it clear that consensual third-party releases were not the subject of its decision.” [Emphasis in original.] He went on to say that “Purdue Pharma expressly declined to discuss how parties may manifest their consent to third-party releases.”

Judge Lane defined an opt-out plan as one where the creditor doesn’t return a form with the opt-out box checked. An opt-in plan is one where the party must return a form and check a box indicating consent to granting releases.

Reviewing cases decided before Purdue, Judge Lane said that “the majority of judges” in New York did not require opting in, as long as the parties were given “clear and prominent notice and explanation of the releases and [were] provided an opportunity to decline to grant them.”

In cases decided after Purdue, Judge Lane cited In re Roman Cath. Diocese of Syracuse, 2024 Bankr. LEXIS 2807, at *5 (Bankr. N.D.N.Y. Nov. 14, 2024), as allowing creditors to evidence consent by having been given the opportunity to opt out. To read ABI’s report, click here. Next, he cited In re Tonawanda Coke Corp., 662 B.R. 220, 223 (Bankr. W.D.N.Y. 2024), where the ability to opt out wasn’t enough. However, Tonawanda involved a chapter 11 plan with a tiny distribution and large tort claims. To read ABI’s report, click here.

“Given the weight of the authority in this Circuit,” Judge Lane held “that the proposed Third-Party Releases here are consensual — and the proposed opt-out mechanism permissible.” Among other things, he noted that the releases were “clearly worded and prominently presented in all of the Plan materials.” Distinguishing Tonawanda, he said that the case before him was “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.”

Of perhaps most importance, Judge Lane noted that the only impaired creditors granting releases were parties to the restructuring support agreement that had been signed by 98.1% of the holders of impaired claims. “As for parties who voted on the Plan but did not exercise the opt-out,” he said, “those parties have manifested their intent by taking the affirmative act of voting on the Plan while declining to exercise the opt-out.”

For Judge Lane, the “most difficult” category included creditors who were not voting but were deemed to have accepted the plan, and those who could have voted but didn’t. For those groups, he said that they had been given “a clear and prominent vehicle for opting out.” Furthermore, he said “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).”

Factually, Judge Lane distinguished pre-Purdue cases relied on by the objectors.

Authorities Outside the Second Circuit

Following Purdue, Judge Lane said that “the majority of courts outside this jurisdiction have permitted an opt-out mechanism for a consensual release given circumstances similar to those presented here.” He cited In re Lavie Care Ctrs., 2024 Bankr. LEXIS 2900 (Bankr. N.D. Ga. Dec. 5, 2024); and In re Robertshaw US Holding Corp., 662 B.R. 300 (Bankr. S.D. Tex. 2024). To read ABI’s reports, click here and here. Judge Lane said that the “Objectors rely on several cases outside the Second Circuit that are distinguishable from the facts here.”

Judge Lane considered the objectors’ reliance “on the thoughtful discussion of releases” by Bankruptcy Judge Goldblatt in Smallhold. There, he said that parties who “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.” Smallhold, he said, could not be reconciled with authorities in the Fifth Circuit, where nonconsensual third-party releases have never been permitted. Courts in that circuit, he said, “have routinely allowed consensual releases using an opt-out mechanism before Purdue Pharma.”

Analogy to Contract Law

Judge Lane ended his 47-page opinion by addressing the U.S. Trustee’s contention that the releases were not permissible as a matter of contract law, similar to the analysis by Judge Goldblatt in Smallhold. He said that the Restatement (Second) of Contracts “clearly recognizes that silence and/or inaction may constitute consent” in three circumstances.

Prominently, Judge Lane said that “silence and inaction will constitute acceptance of an offer when ‘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.’ Restatement (Second) of Contracts § 69(1)(b).” The exception, he said, was “tricky” when applied to nonvoting creditors.

However, Judge Lane found no reason to decide the question as a matter of contract law “given the Court’s conclusions above that consent exists as to these creditors under applicable federal bankruptcy law.”

Approving the releases “and the opt-out mechanism in the Plan,” Judge Lane directed the parties to submit an order consistent with the confirmation order.

Observations

Judge Lane’s opinion is an excellent survey of pre- and post-Purdue caselaw on opt-in versus opt-out. The opinion, however, may have limited precedential value because no one with an economic interest opposed the releases. Moreover, noteholders with an economic interest had given virtually unanimous written consents to the releases.

Keeping in mind that general unsecured creditors were unimpaired, Judge Lane’s decision might be seen as standing for the principle that nondebtor releases are permissible when impaired creditors are overwhelmingly in favor of the releases and everyone else is paid in full.