The airline industry has faced its share of turbulence in recent years, from the COVID-19 pandemic to fluctuating fuel costs and fierce competition. In 2024, Spirit Airlines (“Spirit”) commenced chapter 11 bankruptcy proceedings to implement a new financial structure, employing a pre-packaged reorganization plan (the “Plan”). The Plan contained a controversial third-party release, which indicated that third-party creditors were deemed to have consented to release of their claims against Spirit Airlines, unless they affirmatively stated otherwise through specific methods (the “Release”). The Release became the catalyst for the broader issue of consent and whether a failure to opt-out could implicitly constitute consent to opt-in. Ultimately, the Court held that the provision afforded adequate consent.
Specifically under the terms of the Release, third parties were deemed to consent to a release of their claim against Spirit unless they affirmatively opted out of same by either: (1) checking a box on a timely submitted form; (2) indicating their preference on an online portal; or (3) filing an objection with the bankruptcy court. Under the Release, if a third party failed to opt-out according to one of the three aforementioned methods, their inaction would constitute consent to releasing their claims against Spirit.
The Securities and Exchange Commission (“SEC”) and United States Trustee (“UST”) vigorously opposed the Plan, challenging the Release specifically, which they characterized as an impermissible, non-consensual third-party release in violation of the Supreme Court’s landmark ruling in Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024). The SEC and UST argued that for the Plan to comply with Purdue Pharma, it must adopt an “opt-in” provision vis-à-vis third-party claims (where release of claims can only occur if a party affirmatively consents to release the claim).
The Bankruptcy Court for the Southern District of New York disagreed with the SEC and the UST, and instead held that the opt-out mechanism vis a vis the Release was both consensual and permissible. The Court first noted that, in certain contexts, consent can be given by inaction. The court clarified that Purdue Pharma only prohibited non-consensual releases, where parties are deemed to release a claim regardless of their preference, but Purdue Pharma did not prohibit releases that lawfully acquire consent by inaction.
Though the Court identified a critical requirement on lawful consent-by-inaction, requiring that “adequate notice” of the Plan’s contents must be given to affected parties. The Court reasoned that notice affords a third party the opportunity to act. Without notice, the third party possesses no opportunity to act, which precludes any “consent” by inaction. As applied to the facts in In re Spirit Airlines, the Court held that all third parties were adequately notified of the Plan, noting that the case was highly publicized, the Release was unambiguous, and that the Release was a “clear and consistent” element of the Plan from the commencement of the bankruptcy case. Therefore, third parties were deemed to have manifested consent by their failure to make known their preference via the three opt-out methods.
The Court’s ruling places a greater burden on creditors to actively monitor bankruptcy proceedings, in that failure to do so may result in claim extinction through inaction. And while the Court’s decisions was favorable to Spirit, this holding presents mixed implications for future debtors. Advantageous are the possibility of expanded tools for achieving comprehensive claim resolution, a reduced need to secure affirmative creditor consent for third-party releases, resulting in the potential for more efficient plan confirmation processes. On the contrary, the adequate notice standard may be difficult to satisfy for less prominent debtors, as Spirit’s unique position as a major airline with extensive public visibility is not consistent with the average debtor’s position, and thus this case may be easily distinguishable.
Nonetheless, this case represents an important evolution in third-party release jurisprudence following Purdue Pharma, establishing permissible parameters for obtaining consent to third-party releases and validating opt-out mechanisms as viable alternatives to opt-in requirements when properly implemented with adequate notice serving as the lynchpin for proper consent-by-inaction provisions.