By: Donald L Swanson
In Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), the Supreme Court declares:
- the Bankruptcy Code does not authorize non-consensual third-party releases in Chapter 11 plans of reorganization; but
- “Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan”; and
- “Nor do we have occasion today to express a view on what qualifies as a consensual release” (603 U.S. at 226-27; emphasis added).
A recent opinion (In re Spirit Airlines, Inc., Case No. 24-11988 in the S.D.N.Y. Bankruptcy Court (decided March 7, 2025; Doc. 520)), decides this question:
- Can a creditor’s consent to a third-party release arise from an opt-out plan voting mechanism?
Consensual Release Rules
On the question of what qualifies as a consensual release, the rules of law include the following, according to Spirit Airlines.
A Chapter 11 plan is a “super-contract” because of applicable provisions of the Bankruptcy Code (including § 1123 and § 1124) and principles of res judicata. Generally speaking:
- § 1123 lists the content provisions for a proposed Chapter 11 plan, including rights of a creditor that “agrees to a less favorable treatment” (§ 1123(a)(4));
- § 1124 defines the concept of “impairment” of claims; and
- a creditor’s act of agreeing “to a less favorable treatment” under § 1123 does not make that creditor “impaired” under § 1124.
The Bankruptcy Code does not define what it means under § 1123(a)(4) to “agree,” which requires courts to look to the ordinary meaning of that word. The verb “agree” is a general term that is understood to mean either “to concur in (something, such as an opinion)” or “to consent to as a course of action.”
So, the question is this: What does consent look like?
Opt-In v. Opt-Out
Courts have two procedural choices for showing consent in a plan confirmation context—opt-out and opt-in. Here’s how the two choices work:
- for “opt-out,” a creditor consents to a third-party release, unless that creditor submits a ballot with the “opt-out” box checked or by objecting to the releases; but
- for “opt-in,” a creditor does not consent to a third-party release, unless that creditor submits an “opt-in” form that is separate from the creditor’s vote on the plan.
Opting-out is, obviously, easier and more convenient to do than opting-in. And the U.S. Trustee’s position in Spirit Airlines is that the only acceptable way to express consent is through the harder and more inconvenient method.
Spirit Airlines Facts
In Spirit Airlines:
- an “opt-out” mechanism is established;
- information about third-party releases and opting-out are featured prominently in the Plan and Disclosure Statement; and
- the deadline for opting-out of the third-party releases was January 21, 2025 at 5:00 p.m.—at which deadline, 190 opt-out elections are received.
Rejected Legal Argument
The Spirit Airlines opinion rejects the U.S. Trustee’s arguments that (i) an opt-in mechanism is the only permissible way to manifest consent, and (ii) an opt-out mechanism is never appropriate.
The Spirit Airlines opinion relies upon the following legal precedents.
–Other Opinions in the Same Circuit
A majority of decisions in the Spirit Airlines circuit permit an opt-out mechanism, if creditors (i) receive a clear and prominent notice and explanation of the releases, and (ii) have an opportunity to reject the releases.
In one such opinion a court approves an opt-out mechanism because the plan ballot clearly explains the opt-out procedure and puts parties on notice that their rights are affected.
In another opinion a court rules: “inaction is action” when someone is clearly and squarely told that, if you fail to act your rights will be affected—such person is on notice that they need to do something or else, and “That’s not a trap.”
In yet another opinion a court approves an opt-out mechanism that is clearly and prominently noticed and explained.
Other decisions in the same circuit also consider additional factors, such as:
- whether creditors have an economic disincentive to follow the bankruptcy case;
- whether the requested release has been consistently presented to creditors;
- general principles of contract law embodied in the Restatement of Contracts;
- active involvement in the case by creditors and their counsel;
- large amounts of additional consideration from released parties providing meaningful distributions to creditors in exchange for the releases; and
- the risk that an opt-in procedure would cause released parties to withdraw their contribution.
–Opinions from Other Circuits
Since the Supreme Court’s Purdue Pharma opinion, the majority of courts outside the Spirit Airlines circuit have permitted an opt-out mechanism for consensual releases in similar circumstances.
One court, for example, approves a plan that releases plan sponsors, who provide:
- a $10.75 million payment;
- waiver of a $20 million DIP loan;
- restructuring and assumption of obligations of secured lenders and landlords;
- payment of administrative and priority creditors; and distributions to various classes of unsecured creditors ranging from 1% to 10.9%.
That approval also cites the following factors:
- without such contributions, the plan would not have been possible, and many creditors would not have received any distribution at all;
- under the plan, if a creditor does not consent to the releases, the creditor must vote to reject the plan or opt-out of the release by checking the box on the ballot; and
- the court cites the “overwhelming majority of cases” that find a creditor’s accepting vote for a plan containing third-party releases “makes the release consensual.”
Another court approves opt-out consents because, (i) the Purdue Pharma opinion leaves consensual releases untouched, (ii) prior case law in this district approves consensual third-party releases with an opt-out mechanism, and (iii) the opt-out mechanism affords affected parties both constitutional due process and a meaningful opportunity to opt-out.
The same court adds:
- hundreds of chapter 11 cases have been confirmed in this District with consensual third-party releases under an opt-out mechanism; and
- the U.S. Supreme Court’s Purdue Pharma ruling does not change the law in this Circuit.
–Distinguishable Opinions
Cases reaching a contrary result are distinguishable. In one such opinion, for example, an opt-in mechanism is required because the projected recovery for two impaired classes was zero. In Spirit Airlines, by contrast, all affected creditors are receiving a substantial recovery.
The Spirit Airlines Court “takes the Supreme Court in Purdue Pharma at its word that nothing in that decision calls into question a consensual third-party release.”
Conclusion
Accordingly, the In re Spirit Airlines opinion declares:
- “the proposed Third-Party Releases here are consensual.” and
- “the opt-out mechanism utilized is appropriate given all the facts and circumstances.”
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