Court Opinion Review: Spirit Returns to Chapter 11, Gatekeeper Provisions Rejected in Avon and Calling the Debtors’ Bluff in Merit Street

Octus’ Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Octus as a whole. Today, we consider feasibility questions in Spirit Airlines, the rejection of gatekeeper provisions in Avon and another debtor/DIP bluff in Dr. Phil’s Merit Street case.

Not Asked, Not Answered

Is there a more meaningless confirmation requirement than feasibility? At a confirmation hearing on Feb. 13, Judge Sean H. Lane concluded that Spirit Airlines’ chapter 11 plan satisfied all of the confirmation requirements in section 1129(a) of the Bankruptcy Code, including that confirmation of the plan was not “likely to be followed by the liquidation, or the need for further financial reorganization” of the debtors.

That’s Feb. 13 of 2025, by the way. Less than seven months later, Spirit Airlines filed again, kinda suggesting that maybe confirmation of the prior plan was likely to be followed by further financial reorganization, because, well, that’s what actually happened.

Judge Lane wasn’t wrong about the feasibility of Spirit’s first plan, so much as he just didn’t think about it at all. Although styled as “Findings of Fact and Conclusions of Law,” the confirmation order says only that the “facts and legal arguments set forth in the Record, including the evidence and argument at the Combined Hearing, demonstrate that the requirements for Confirmation of the Plan have been satisfied.”

Not that the debtors gave the judge much to work with. The Jan. 16 confirmation brief includes a single paragraph applying the legal feasibility standard to these debtors, and it doesn’t even cite a declaration. Seriously, here’s the whole thing:
 

That paragraph is the pleading equivalent of a month-old La Croix you found on top of a cardboard box in a musty basement: tepid, flat and with the faintest hint of what might have once resembled real flavor. The confirmation declaration of CFO Fred Cromer doesn’t add much either: Cromer says he believes “that the Restructuring Transactions are reasonably likely to succeed and that the Reorganized Debtors are not likely to require further financial reorganization or a liquidation” and then provides a summary of the transactions, as if the deleveraging alone demonstrated feasibility. Spoiler alert: It did not.

Not that this is uncommon – knowing judges won’t really consider any confirmation requirement that doesn’t draw an objection, debtors tend to say as little as possible. Still, the Spirit brief seems scant even by this low standard; for example, the Sept. 4 confirmation brief filed by middle-market debtor Mosaic Sustainable Finance features four whole paragraphs on feasibility, including a first, second and third. Guys, we only have so much time!

Sure, nobody objected to the feasibility of the first Spirit plan, but nobody had to for Judge Lane to take the requirement seriously. Section 1129(a) specifically provides that the bankruptcy court can confirm a plan only if all of the statutory requirements are satisfied, meaning nobody has to object for the judge to insist on real evidence that the plan is feasible (unlike, say, the best interests of creditors test in section 1129(b), which only applies if an impaired class rejects or is deemed to reject the plan).

No, we are not suggesting that bankruptcy judges spend four hours cross-examining the debtors’ financial advisor on the assumptions built into the plan projections (read: whatever assumptions are necessary to get projections that show feasibility while hitting the desired valuation target) at every confirmation hearing, though we would honestly love to see it.

What we are suggesting is that judges should ask some questions when the nature of the company and the plan suggest obvious feasibility issues, as in Spirit. Spirit’s first case had more than enough red flags to require a more robust showing that the company wouldn’t plunge back into chapter 11 within six months of emergence.

To start, we are talking about an airline, and airlines don’t have the best track record of successful reorganization (unless, like most bankruptcy judges, you assume “successful reorganization” means “confirmed plan”). And this was obviously a very troubled airline in a very dangerous part of the market. In June 2024, Octus analyzed the space and concluded that ultra-low-cost carriers like Spirit “may be in a precarious position, as they do not fly the profitable transatlantic routes, and their customer base tends to be more price conscious and less loyal, so competing with other carriers potentially willing to lose money on domestic routes is likely a difficult task.”

In July 2024, Octus ran the numbers on Spirit in particular with a bankruptcy just over the horizon, and it was not a pretty picture. “With minimal scope to restructure operationally” through a bankruptcy process, “it is challenging to envision Spirit emerging as a going concern, and consequently an in-court process would likely be focused on maximizing aircraft valuations, likely through transfers to other operators, whether through piecemeal sales or a merger,” we said.

That’s right: Four months before Spirit even filed, we predicted the plan it would propose in its first bankruptcy would probably not address the issues that needed addressing.

We were not wrong. Spirit filed chapter 11 in November 2024 with a plan that addressed absolutely zero operational issues – no fleet rationalization, no collective bargaining agreement renegotiation, no cost savings, no asset sales. Nonfunded debt claims simply rode through the bankruptcy. Sure, the company equitized debt – but that obviously did nothing to address its operational challenges. Maybe that was because, as we hinted in October, there was little scope for the company to restructure operationally in chapter 11. But that just bolsters the case for a closer look at feasibility.

In December 2024, Octus took a look at Spirit’s financial projections in connection with the first case and found them utterly unconvincing. We don’t typically just come out and say this, but Spirit gave us little choice: “With costs already near its target levels even before the company has fully implemented actions to align its offering with those higher-fare peers, whose meaningfully higher cost structures are not likely to be solely attributable to less efficient operations, Spirit’s forecasts do not seem easily attainable, in Octus’ opinion.”

This combination of a struggling company in a volatile industry and a plan that did very little to address those struggles should have given Judge Lane pause. Instead, he took the usual mega-case judge approach to the first bankruptcy, sidestepping most issues that did not draw an objection. Instead, he spent a week mulling over the U.S. Trustee’s objection to the plan’s opt-out nondebtor releases.

That’s actually a pretty telling example: Bankruptcy judges (and, well, us, frankly) tend to focus more on whether they can prevent nonbankruptcy litigation between nondebtors than whether debtors have presented more than the barest scintilla of self-serving evidence on a core bankruptcy issue like feasibility.

Spirit could also be a decent example for an argument that feasibility really shouldn’t matter that much in some cases. In the first case, the debtors were quite explicit that they were only shoring up one part of their capital structure and not touching operations. They didn’t say it, but to us that sounds a lot like an “in court LME,” with a lot of the same f*ck around and find out energy that dominates “real” LMEs: Address the issue at hand and hope things turn around. If things go south, there’s always chapter 11 (again). If the LME folks can shoot the moon, why can’t we?

Sadly, the answer probably goes back to one of our core hangups: credibility. At some point, bankruptcy judges must address the fact that their feasibility determinations (and related valuation conclusions) have very little credibility outside of the bankruptcy-industrial complex. Those outside our little world think that when it comes to financial analysis, bankruptcy judges are completely reliant on inherently unreliable expert witnesses presented by litigants and have little idea what feasibility or enterprise valuation really entails.

The proof of this pudding is in the eating: Based on our experience, the precious few valuation trials in bankruptcy that get to a judicial decision usually end with a half-hearted attempt to split the baby or completely rogue stuff like in Sanchez. If you buy that there is some level of science behind how valuation ought to be conducted, splitting the baby between two extreme litigation positions isn’t “fact-finding.” Arguably, as fact finders on this core part of reorganization practice, bankruptcy judges show remarkably little interest in finding the real facts.

F*ck around and find out might work for sophisticated parties beating each other over the head with Serta blockers, but it shouldn’t fly in court. Every time a company files chapter 11 within a couple of years of emerging, the bankruptcy judge who confirmed the first plan should be embarrassed. They should feel like one of their findings, in a serious and consequential legal proceeding, was wrong. And being really, really wrong should have consequences.

Our modest proposal: When a company files again within six months, the bankruptcy judge should have to wear a dunce cap that says, “I Didn’t Ask Any Questions,” at every hearing in the chapter 22 case. Maybe if we gin up some negative consequences, bankruptcy judges will start taking feasibility seriously – and that could be a first step toward taking themselves, and the bankruptcy system, more seriously. The risk here is bankruptcy being viewed by sophisticated market participants (and policymakers) as a kangaroo court shoving cases along to confirmation and welcoming them back again without a hint of reflection.

We are kidding about the dunce cap (kind of) and realize there will always be the rare case where a post-emergence surprise dooms a careful attempt at reorganization. But the examples at the other end of the spectrum are starting to pile up.

Avon Calling

For those of you wondering what we mean when we say a bankruptcy judge’s job is hard and requires making difficult choices after carefully considering the evidence and legal issues, we now have an excellent example of exactly what this looks like from Friend of the Show Judge Craig T. Goldblatt. On Aug. 21, Judge Goldblatt entered a 98-page order – ninety-eight pages – resolving various issues with the Avon Products plan.

After laying out the issues, arguments, legal standards and analysis in incredible detail, Judge Goldblatt concludes that Avon’s plan is confirmable, subject to certain changes – most notably, removal of a controversial “gatekeeper” provision that would have required nondebtors to get Judge Goldblatt’s permission before asserting claims against specified nondebtors in another court.

Ironically, Judge Goldblatt is the type of bankruptcy judge we would trust to handle such a request fairly – proving the old adage that the best person for the job is often the one who doesn’t want it.

Gatekeeper provisions are one of the sticks debtors use to coax reluctant nondebtors into agreeing to a plan’s nondebtor releases in the post-Purdue Pharma era. Since debtors can no longer impose such releases on unwilling creditors or shareholders, they offer carrots (including enhanced distributions or accelerated, no-questions-asked payouts for those who opt in or decline to opt out) and sticks to get them on board.

Gatekeeper provisions generally work hand in hand with other sticks like mandatory alternative dispute procedures or just plain stalling out claims reconciliation for recalcitrant creditors who insist on their god-given right as Americans to sue somebody, anybody in a state or federal court of proper jurisdiction. By making prosecution of claims against protected nondebtors more difficult and expensive, debtors attempt to coerce release opponents into just dropping the idea and accepting what the debtors give them under the plan.

There also seems to be a hope that friendly big-case bankruptcy judges will refuse to grant permission for creditors or shareholders to sue protected nondebtors when asked.

Gatekeeper provisions generally feature two elements: an injunction requiring nondebtors to ask the bankruptcy court for permission to bring claims against a protected nondebtor and a requirement that the bankruptcy court determine the putative claim is “colorable.”

The first element is a little less problematic than the second. By entering the injunction, the bankruptcy judge basically takes exclusive jurisdiction to determine whether pursuit of the claim would violate the confirmation order or other orders entered in the bankruptcy case. Since the bankruptcy judge entered those orders, the theory goes, he or she should be the one to decide what claims those orders preclude.

This usually means considering whether the claimant properly opted out of or declined to opt in to the plan’s nondebtors releases – pretty straightforward stuff – or, more difficult, considering whether the claim the nondebtor wants to pursue actually belonged to the estate, in which case it could be discharged under the plan without violating Purdue.

Remember, Purdue only prohibits the nonconsensual release of direct nondebtor claims against other nondebtors. If a creditor is asserting a claim that can be construed as belonging to any or all creditors – a derivative claim – that belongs to the estate and can be released as long as the statutory predicates for confirmation or – much easier – settlement of estate claims are met.

For an analysis of the difference between debtor releases and nondebtor releases and the importance of determining whether claims are direct or derivative, check out Judge Michael Kaplan’s August 2024 Whittaker Clark decision, currently on appeal at the Third Circuit.

In that case, Judge Kaplan held that nondebtors’ talc personal injury claims against the nondebtor entity that acquired the debtors’ assets prepetition actually belonged to the debtors, making them dischargeable under a plan – even though the debtors, who merely sold their assets, quite obviously could not have asserted such claims against the buyer themselves outside of bankruptcy.

According to Judge Kaplan, the “mere continuation” successor liability claims belong to the debtors’ estates because “they seek to hold non-debtor entities indirectly liable for the debtors’ tort liabilities, rather than remedy a harm that a Tort Claimant or creditor can directly trace to a non-debtor third party.”

Imagine you have been using a product every day for decades – baby powder, let’s say – and you are told you now have cancer that might have been caused by that product, even though the manufacturer never warned you that might happen. You thought you were buying that baby powder from one company the whole time, but turns out that 35 years ago, the original manufacturer actually sold its baby powder division to another company.

You bring your claim against both companies, but then the first manufacturer files for bankruptcy and gets an obliging judge to issue a nondebtor litigation injunction preventing you from proceeding against the second company while the first company’s bankruptcy is pending for years. The first company finally proposes a plan that includes releases for the second company and provides you with a few pennies on your claim.

The second company then argues that even though you opted out, you can’t sue it because your claims belong to the first company, which released the second company under the plan. You bought the product, you used the product, you got cancer, you filed a prepetition suit, you paid medical expenses, but because the first company sold its assets and years later filed chapter 11, you can’t sue the second company because your claim is “derivative.”

According to Judge Kaplan, that makes perfect sense. Anyway, however aggressive the reasoning for the actual decision may sound, even we can’t dispute that Judge Kaplan had jurisdiction to render it. Bankruptcy judges often decide whether claims belong to a creditor or the estate. And that’s the first element of a gatekeeper provision.

The second gatekeeper element is the real kicker – whether the claim, assuming it belongs to the nondebtor who opted out, is “colorable.” This puts a bankruptcy judge who lacks jurisdiction to adjudicate such a claim on the merits in the position of nonetheless deciding whether the claim has merit. Why should a bankruptcy court have authority to hear a motion to dismiss a claim by a nondebtor against a nondebtor instead of the court where, you know, the claim would actually be filed (or was already filed before the bankruptcy)?

For the thousandth time: Bankruptcy courts are Article I courts without jurisdiction to resolve nonbankruptcy claims between nondebtors. Deciding whether nonbankruptcy claims between nondebtors are “colorable” is the job of the Article III or state courts that are meant to handle claims like that. But that is the responsibility Avon debtors were asking Judge Goldblatt to take for himself.

Fortunately for Judge Goldblatt, the Fifth Circuit absolutely nuked the gatekeeper concept in its entirety in its March 2025 Highland Capital decision. According to the Fifth Circuit, gatekeeper provisions violate the “bedrock principles” limiting bankruptcy courts’ “power to protect non-debtors” and are “patently beyond the power of an Article I court under § 105.” Amen.

So in Avon, Judge Goldblatt could rely on the Fifth Circuit’s decision when jettisoning the concept into the sun. Judge Goldblatt found that he “does not believe that either the Bankruptcy Code or the Barton doctrine” – god, we are not getting into that right now, just accept its a weird old sideshow, like the Eurovision song contest, and move on – “provides any substantive authority for the bankruptcy court to do anything like this,” and the debtors “have not identified any Third Circuit authority” for it.

The judge remarks that he “does not understand” and “is puzzled by” the very idea of bankruptcy judges having a post-confirmation gatekeeper role. Welcome to the club, Your Honor. Bring it up with the New Jersey office.

The only authority cited by the debtors? Judge Goldblatt’s own approval of a sorta gatekeeper provision in the Avon case itself. Judge Goldblatt admits that he approved a similar concept with respect to successor liability claims in the order approving the debtors’ sale of their assets to Natura. But according to the judge, he made clear in approving that provision that the idea “no one gets to bring a claim that’s actually an individual claim before coming to me and saying pretty please” was beyond his authority.

In fact, Judge Goldblatt says, the Natura sale gatekeeper provision was really about the bankruptcy court’s authority to determine whether claims belonged to the estate – and was not about stopping nondebtors from bringing “noncolorable” claims against nondebtors. That’s element one of the gatekeeper concept, which, like we said, is a bit less problematic.

Except Judge Goldblatt also makes clear he sees no reason why bankruptcy judges should have exclusive jurisdiction to decide whether a nondebtor’s claim was property of the estate. Sure, the bankruptcy court can do that, but so can other courts.

This may hit some of you bankruptcy lawyers hard, but: Believe it or not, bankruptcy issues can be decided by other courts. If someone sues a protected nondebtor in a district court, the nondebtor can file a motion to dismiss arguing that the plaintiff’s claims belonged to a debtor and were discharged by the debtor’s plan. Crazy, right? But true! It happens more than you think.

Come to think of it, why on earth would a bankruptcy judge want to decide whether some creditor’s claim against a protected nondebtor belonged to the estate and was discharged by the plan, or is “colorable” on the merits, long after the judge’s actual job – handling the bankruptcy case – is done? The case is over, the plan is confirmed, let a real court decide, right? Why are bankruptcy judges always being asked to go out of their way to handle stuff they don’t need to handle – and agreeing to do it?

We have a guess: Because debtors know the mega-case judge handling their case is more likely to go their way to get more big cases. Why not take a shot at picking your own gatekeeper rather than relying on some duly-appointed life-tenured district judge? Good customer service continues well beyond the effective date.

We’ve Got Issues

On this week’s episode of Maybe Bankruptcy Judges Should “gamble” every once in a while, we have yet another example of a bankruptcy judge calling the debtors’ bluff for a good cause: the settlement between the Merit Street Media debtors and their official committee of unsecured creditors.

Merit Street, a Fort Worth-based television network and streaming service, filed on July 2 in the Northern District of Texas. The debtors are a joint venture between Peteski Productions, a company majority-owned by Dr. Phil McGraw – yes, that Dr. Phil – and Trinity Broadcasting, a Christian broadcasting network. Serious late-1990s vibes here. Trinity asserts that Dr. Phil defrauded them before filing a bad-faith bankruptcy for the joint venture without their permission, as required by the JV agreements.

On July 18, Trinity filed a motion to dismiss or convert the case to chapter 7, laying out its beef with Dr. Phil. According to Trinity, the self-help guru filed the case to consummate a sham “loan-to-own” strategy, management lacked authority to file, and the case has “no legitimate or valid bankruptcy purpose.” Trinity specifically alleges that Dr. Phil’s proposed DIP loan to the debtors is intended to gin up a credit bid for him to “make off like a thief in the night.”

More important for our purposes, Trinity asked Judge Scott Everett in Dallas – why didn’t Dr. Phil file in Houston, where bogus right-wing media personalities seem to have found a sympathetic shoulder to cry on? – to push the hearing on final approval of the DIP until after deciding the motion to dismiss. According to Trinity, final approval of the DIP would “artificially saddle” the debtor with debt to fund litigation against Trinity, affirm Dr. Phil’s credit-bid rights “against any challenge, even for cause” and “completely absolve” Dr. Phil and his affiliate from wrongdoing.

To our surprise, Judge Everett agreed with Trinity and said he would not proceed with a hearing on approval of the debtors’ proposed $8.7 million second DIP draw to pay professional fees while Trinity’s motion (and creditor Professional Bull Riding’s motion to convert) remain pending, even though the debtors warned that merely putting off the DIP hearing would definitely lead to dismissal or conversion.

Oh no! That means Dr. Phil might have to deal with Trinity’s fraud accusations in a court that is not inclined to side with the debtor. Even worse: Bankruptcy lawyers might not get paid in full immediately. Bravo to Judge Everett for grasping that crackling third rail with both hands.

On Aug. 19, Judge Everett rejected the debtors’ request to immediately dismiss the case – we admire their commitment to the bit, honestly – and refused to allow debtors’ counsel to immediately withdraw, pointing out that the issues raised in Trinity’s motion regarding corporate authority to file and good faith were known to counsel when they signed up.

Alas, our fears for the Oprah bestie who at least one judge called a “charlatan” might turn out to be unwarranted: On Sept. 2, the debtors announced a deal with the official committee of unsecured creditors for a plan sponsored by Dr. Phil. The UCC pact doesn’t resolve the motions to dismiss or convert but obviously weighs against granting those motions.

On Sept. 3, the debtors filed a motion to approve a modified unsecured $10 million DIP, with 0% interest, from Dr. Phil that would cover professionals and other administrative claimants, preventing administrative insolvency (apparently that still matters to some bankruptcy courts). According to the debtors, the new DIP does not grant Dr. Phil any additional credit-bid rights or automatic recourse to foreclose if the debtors default. On Sept. 4, Judge Everett approved the new DIP.

The debtors call the new DIP “an extraordinary concession” from Dr. Phil, but you know better: Debtors and DIP lenders warn in virtually every case that court rejection of some controversial provision will inevitably lead to dismissal or conversion, but in the few cases where bankruptcy judges call their bluff, they almost always fold, meaning it sure seems like they were bluffing. This outcome is about as surprising as the Miami Dolphins kicking off yet another rebuild (we should applaud Mike McDaniel, however, for channeling bankruptcy lawyer-level gallows humor in the off season).

In the majority of cases, the big-case bankruptcy judge doesn’t even seem to consider the idea of saying no to the debtors or DIP lenders. See the “don’t risk the company” decision in Del Monte.

Our favorite example of bluff-calling will always be Purdue, of course: The debtors kept saying that if the Sacklers didn’t get their nonconsensual nondebtor releases, the family would bail, and opioid claimants would be litigating until the end of time without any recovery. Of course Judge Robert Drain accepted this.

Then, on appeal, the releases were struck down twice – first by District Judge Colleen McMahon and then by the Supreme Court – and both times the Sacklers came back with more money for opioid creditors, money they swore they would never provide without those releases.

Even if the Sacklers had walked, calling the debtors’ bluff would have been the right decision. If a debtor cannot fund its bankruptcy case or confirm a plan without violating the Bankruptcy Code or getting a bankruptcy judge to exceed his constitutionally limited authority, then the debtor doesn’t belong in chapter 11. Successfully reorganizing in chapter 11 isn’t supposed to be easy; god knows it ain’t cheap.

The committee settlement doesn’t resolve Trinity’s motion to dismiss or convert or PBR’s motion to convert, but UCC support could go a long way toward keeping the debtors in chapter 11. The hearing on those motions is set for Sept. 16 and 17. Please, please tell us Dr. Phil will be taking the stand! He might be the only one less credible than debtors who swear there is no alternative to approval of some dubious relief other than dismissal.