Spirit Airlines Files for Bankruptcy Protection

August 29, 2025 by Leave a comment

Spirit Airlines has filed for Chapter 11 bankruptcy protection. Chapter 11 means that they are seeking a reorganization (another one – remember that they just came out of chapter 11 earlier this year).

Spirit said it intends to conduct business as normal during the restructuring process, meaning that they will continue to need aircraft parts.

Spirit has published guidance on its restructuring plans. Part of that published plan involves “optimizing” the fleet which likely means that they plan to use bankruptcy to terminate some leases. Spirit will be sending out a Vendor Letter in which they confirm their plan to pay vendors in the normal course of business for goods and services delivered to Spirit on or after August 29, 2025 (today – this is the “post-petition” period). Any outstanding invoices for goods and services delivered prior to our Chapter 11 filing date are considered “pre-petition” claims and will need to be addressed as part of the Chapter 11 process.

It is not unusual to see a bankruptcy trustee seek to recover sums paid in the period immediately before the petition. If you get a letter like this, then please consult with an attorney before you agree to return money to the trustee. In my experience, there can be defenses to such trustee claims.

Those who are owed significant unpaid sums from Spirit should work with bankruptcy counsel to investigate options. Your attorney may be able to negotiate more favorable treatment if you have an ongoing relationship with Spirit, especially if they need your support to continue flying.

For ideas about how to protect your company from a customer’s bankruptcy, please look at some of our older blog posts on the subject:

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Protecting Your Right to Get Paid Vol. 1: Security Interests

June 20, 2022 by Leave a comment

When you sell an aircraft part on credit, you want to make sure you will eventually get paid.  There are a variety of factors that can impede your payment.  This post offers one strategy for increasing the potential to get paid in adverse conditions (through security interests).

If you offer terms, then you are typically offering credit!  Offering credit to a customer is a normal business practice but it creates a risk of non-payment. 

In the most extreme situations, customers can find themselves seeking bankruptcy protection and this can result in their debts to you being reduced or even wiped out, depending on the nature of the proceedings. 

One way to increase your right to get paid is to establish a security interest in the article that is being sold.  One of the advantages of a security interest is if the debtor files for bankruptcy protection, then a security interest changes your payment recovery for the outstanding debts.  Security interests are given a “priority” in bankruptcy.  Typically, when there is a liquidation, certain priorities get paid (in the appropriate order) before unsecured debts.  With a security interest, the securing asset’s value will be applied to the debt. 

For example, let’s say you sell an aircraft asset to a customer for $1,000,000.  You secure the debt with a properly-perfected security interest.  The customer owes the entire purchase price on 90 day credit terms; but before the customer pays, the customer files a bankruptcy petition.

The bankruptcy trustee ultimately sells that asset at auction.  In scenario one, the unit fetches a price of $700,000.  That entire value is assigned to satisfy the security interest.  Which means that you get paid $700,000, and have a remaining unsecured debt of $300,000 (the unpaid balance).  You will get paid with the rest of the unsecured creditors, which might mean pennies on the dollar or it might mean nothing.   While $700,000 might be disappointing, it is a lot better than nothing. 

In scenario two, the unit fetches a price of $1,200,000.  That value is sufficient to fully satisfy the security interest.  Which means that you get paid the $1,000,000 that you are owed and the remaining proceeds of $200,000 will go into the bankruptcy estate (or pay any secondary liens).

Note that there are special bankruptcy rules that apply to certain aircraft and aircraft parts (and can allow for recovery of the complete asset). E.g. 11 U.S.C. § 1110.

You don’t have to wait for a bankruptcy to make use of your security interest. You can also foreclose your security interest upon a default in payment (specific procedures may depend on the language of your security agreement as well as applicable state law).

In my next post I will cover typical mechanisms for filing and perfecting security interests when selling aircraft parts.

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First Position: Priority in Security Interests

July 27, 2020 by Leave a comment

As the global COVID pandemic continues to substantially crimp air travel, we continue to see operators and other industry partners succumb to the economic realities of bankruptcy. As an industry, we’ve seen this before, and we will see it again. But that also means we know that we will come out the other side stronger than ever. One important way to make sure we do is to protect our interests when we extend credit to sell parts.

Last month we discussed steps to attach and perfect our security interest to guard against a customer’s bankruptcy. Perfecting a security interest gives us priority to the asset over any other later-perfecting creditors. Priority is important in deciding who takes proceeds of assets first when more than one secured party has a perfected security interest in the same goods or other assets. The goal is always to be first in priority with respect to the asset.

Generally, security interests are subject to a “first to file” rule (see UCC 9-322(a)), so whoever perfected their security interest first is first in line to the proceeds of those specific debtor assets in the event of bankruptcy. In many commercial instances this means that a bank or other lender that provided financing for the company will have a perfected security interest over not just the business’s assets at the time of the loan, but over all after-acquired assets as well. This so-called “floating lien” is a common way to secure loans to businesses.

Obviously, this sort of “all future assets” perfected security interest is problematic for a distributor who seeks to sell inventory to a customer on net 30 (or other credit) terms, because the inventory sold by the distributor, even upon perfection of a security interest by the distributor, would mean the distributor was secondary (or “junior”) to the lender even with respect to its own goods sold. As we have previously discussed, when assets are liquidated to satisfy all a business’s creditors there is generally not going to be enough money to go around. Securing first priority is therefore very important to a distributor seeking to protect against insolvent customers.

As you might have guessed, knowing that they could be subordinate to a previously secured lender (with the mega-resources to fight for its position in bankruptcy court) could easily discourage a business’s suppliers from selling to that business on anything other than a cash basis if the business hits a bumpy patch or the entire economy takes a negative turn. Reticence on the part of suppliers worried about getting paid can hurt a struggling business’s ability to continue in its ordinary course, creating a feedback loop that can doom the already struggling business, which likely does not have the cash on hand to buy inventory on cash terms.

Fortunately, the UCC anticipates this problem and has built in provisions to encourage suppliers to a struggling business to continue supplying (on credit) without sacrificing to a large lender priority in the goods they sell. Enter: the Purchase-Money Security Interest (“PMSI”).

Remember, to have a security interest we need attachment and perfection. And as we just discussed, perfection is generally subject to the first-to-file principle. A PMSI allows a seller of goods that sells on credit terms to gain a first-priority security interest—essentially jumping ahead of all other creditors regardless of when they perfected their security interests—in specific goods sold when the customer/debtor incurs a purchase money obligation to the seller of the goods in order to purchase the goods.

There are several variations on PMSIs, but for our purposes we are concerned with PMSI in inventory sold. (PMSI in equipment may also be important.) PMSIs in inventory sold can be slightly complex, so it is important to pay attention to the details and make sure each step is taken to secure your interests in your goods sold.

The key complication in a PMSI for inventory is the requirement that the security interest be perfected before the goods are received by the debtor. Ordinarily, perfection allows for the filing of a financing statement (usually the UCC-1) after the debt is incurred. This is also true of PMSIs in consumer goods, which allow a PMSI to be perfected if a financing statement is filed within 20 days. Distributors, however, are not generally viewed as selling consumer goods. Distributors sell inventory to their customers. Thus, special rules for PMSI must be followed (see UCC § 9-324).

As we said, for the PMSI in inventory to be effective we must perfect prior to the goods being delivered to the customer. This means filing our UCC-1 before delivery. Ideally, this will occur before the goods even leave our facility.

Next, we need to notify any other higher priority secured party in writing. So, if a lender has provided financing for our customer and has a floating lien over all of the customer’s assets, we are required to notify that lender in writing of our PMSI in the specific inventory (more on this in a moment).  You can find previously secured lenders and other parties with security interests by searching the UCC-1 filings in the state where the customer is incorporated or headquartered. (It is generally best to search both locations to ensure all your bases are covered, as well as, for companies with locations in multiple states, the state in which the actual destination facility is located.)

The notice to other secured parties should be sent by a secure, trackable system, like certified mail, return-receipt requested and—like PMSI perfection—the notice must be received before the goods are delivered to the customer. (Notice must also be renewed every five years in the event the security interest is held that long.)

Finally, the notice must state that the distributor has or expects to acquire a purchase-money security interest in inventory of the debtor (again, this is your customer) and describe specifically the inventory affected. This can be done directly in the notice, or by referencing and attaching a copy of the commercial invoice if it provides enough specificity to identify the inventory secured.

A PMSI in non-consumer goods takes much more effort than perfecting an ordinary security interest, so factors like the value of the credit extended, customer payment history, and current financial strength of the customer (or the economy more broadly) will all factor in deciding whether the additional steps to a PMSI are worthwhile.

Remember, priority of security interest is key to payment when a customer becomes insolvent. When the economy is rocky it is important to pay attention to the financial health and track record of your customers and the customers of your customers. Our industry has and will continue to see its fair share of liquidations and restructurings. By monitoring the health of your customers and taking the steps to meticulously secure your interests, you put your company in the strongest position to fight through troubling times.

As always, these things can be complex. When in doubt, contact your lawyer.

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Steps to Perfection: Security in a Time of Insolvency

June 12, 2020 by 1 Comment

Last week we had a brief overview of some bankruptcy issues and talked about the some of the risks presented by bankruptcy filings in these uncertain times. Today we are going to expand on ways to mitigate some of those risks when we aren’t in a position to demand and receive cash in exchange for goods.

The most important step to take to ensure you are protected against the risks of an insolvent customer is to attach and perfect a security interest in the goods sold to the customer. A security interest in the goods you sold on credit helps you to get paid first (before unsecured creditors, shareholders, and others, who often get nothing) in the event your customer enters bankruptcy.

Many companies are good at attaching a security interest to goods sold on credit by including terms that state the buyer grants the seller a security interest in the goods sold to secure the purchase price. If your sales agreements do not include such a provision you should work with a lawyer to make sure that they do.

An attached security interest on its own, however, has little effect in truly securing you as the seller (and more importantly, as creditor). In order to be effective, a security interest must be perfected. A perfected security interest gives notice to the world that you have a security interest in the particular goods so that others who may attempt to attach a security interest later know that they are behind you in priority.

Let’s drill down a bit deeper on the ideas of “attachment” and “perfection.”

Attachment

The Uniform Commercial Code (UCC) provides that “[a] security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral . . . .” (UCC § 9-203). The debtor in this case is your customer. The UCC goes on to explain what it means for a security interest to become “enforceable.” (We have limited the text to be relevant for our purposes, because some very specific things, like descriptions of timber to be cut, simply don’t apply!)

Under the UCC, “a security interest is enforceable against the debtor and third parties with respect to the collateral only if:”

(1) value has been given

In this case, the goods sold in exchange for the promise to pay the purchase price in the future—for instance on net 30 terms—is value given.

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party

Here, the debtor (your customer) gains the rights in the collateral and power to transfer rights when they receive the goods.

And finally, (3) one of the following conditions is met (only one is applicable for the purposes of this discussion):

(A) the debtor has authenticated a security agreement that provides a description of the collateral

A security agreement is any agreement that provides a security interest, for instance our sales agreement (with appropriate terms, as mentioned above). To authenticate the agreement, the debtor (customer) merely needs to sign it (or otherwise accept the record through electronic sound, symbol, or process). The security agreement must also provide a reasonably detailed description of the collateral. The part number, nomenclature, and quantity that appears on our documentation is an example of a reasonably detailed description.

Although verbose, the process of attaching a security interest is relatively straight forward and many or most of you may be doing it now. You should review the terms and conditions that appear on your quotes, confirmations, invoices, and other sales documents to be sure. If there are questions, remember to consult your attorney.

Perfection

Merely attaching a security interest, though, is not enough to protect you. In fact, an attached security interest without more provides little security indeed. In order to protect your interests, you must perfect the security interest. This gives notice to others that you have a security interest (in the form of a lien) against the goods. That way if they attempt to attach their own security interest to the goods or other assets to protect their extension of credit (for instance in the form of a loan), they know that they are behind you in order of priority with respect to those goods. (We’ll have more to say about priority in our next post—sometimes a previous secured lender like a bank may have priority for even newly acquired goods).

The exact details of perfecting a security interest are a matter of state law, but in general the primary method of perfecting a security interest is by filing a financing statement with the relevant public office—usually the Secretary of State. The UCC specifies the elements required in a financing statement in § 9-502:

  • The name of the debtor
  • The name of the secured party
  • An indication of the collateral

Typically, you can use as your financing statement a Form UCC-1, which is a standardized form that is widely available online, often via the very state agency with which it must be filed.

The most important thing to note in completing the financing statement is that the name of the debtor (your customer) must be precise. The UCC explains that it should be the name that is listed on the company’s most recently filed document in its jurisdiction of registration. (See UCC § 9-503). Put another way, the debtor name on the financing statement should be the most up-to-date name of the organization as filed in its state of incorporation. This level or precision is necessary because the financing statement is recorded under the debtor’s name and it must be of sufficient detail to put other potential secured parties on notice.

The secured party’s name is more straight forward (your company) and the indication of the collateral can be the same as appeared on the security agreement we discussed above, for instance, part number, nomenclature, and quantity.

The financing statement is generally filed where the debtor is incorporated, so make sure you are identifying the appropriate jurisdiction’s requirements. You can often kill two birds with one stone because the Secretary of State is typically where the financing statement is filed (and can be found) and you should also be going there to identify the correct name of the debtor for the financing statement anyway. As always, if you have any questions, you should consult an attorney.

As a secured creditor you can have confidence you will get paid (at least in part) even if a company becomes insolvent, because the liquidated assets of an insolvent company are first used to pay secured creditors. Specifically, the money raised from the liquidation of your secured goods is used to pay your security interest. This also applies to proceeds from those goods when the proceeds are directly identifiable. Creditors with no security are often left hoping for a share of what little is left after the secured creditors are paid.

Attaching and perfecting a security interest in goods sold is a valuable risk mitigation strategy. While it may not be as relevant when the economy is hot, when the economy gets rocky and the industry sees upheaval it is an important way to protect yourself against the unpredictability of the global aviation market.

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Bankruptcies are Happening. What do you need to know to protect yourself?

June 3, 2020 by 1 Comment

It is no doubt that these are trying times. With air travel substantially curtailed the need for parts to support commercial fleets is significantly reduced. That means challenges for distributors. Adding to those challenges is a harsh reality: even when customers are buying parts,  they may have difficulty paying. And when a customer to whom you’ve extended payment terms becomes insolvent, you may be left holding the bag.  So far in 2020 we’ve already seen several operators enter bankruptcy, including Flybe (UK), Virgin Australia, Avianca, and LATAM.

Struggling operators still need parts to maintain their aircraft, and therein lies the rub. Distributors want and need to sell parts, and airlines want and need to buy them. With an airline that may be on the brink of bankruptcy, the question becomes how can a distributor make a much-needed sale, and protect itself against the risk that the customer may not be able to pay?

Obviously, the safest way to protect yourself is to require cash up front. If you and your customer are in a position to make such an arrangement, great! You can stop reading now. But the reality of our (and may others) industry is that goods are typically sold on Net 30 or similar terms. If you send goods to your customer and they declare bankruptcy before you get paid (or worse, have several outstanding invoices unpaid), you may be placed into a class with dozens of other unsecured creditors fighting for pennies on the dollar of what you were actually owed.

When cash is tight invoices can pile up. So, what steps should a distributor take to protect itself in the face of a struggling customer? In this series of articles, we’ll discuss the steps necessary to attach and perfect a security interest in goods, as well as mistakes to avoid to ensure payments your customer makes to you can’t be clawed back.

First, though, there are some things to know about bankruptcy filings. For the purpose of these articles we’ll be focusing on the US bankruptcy laws, which are found in Title 11 of the United States Code. The two types of bankruptcy filings most people are familiar with occur under Chapter 7 of the Bankruptcy Code (Liquidation) and Chapter 11 (Reorganization).

Under a Chapter 7 filing, an organization (like an airline) will cease operations and a trustee will be appointed to sell the company’s assets to satisfy creditors. Creditors are divided into classes with secured creditors being first in line to be paid, followed by unsecured creditors, and finally stockholders.

Secured creditors are those whose credit is backed by collateral. Unsecured creditors have extended credit but without the backing or security of collateral. Aircraft parts distributors can fall into either category depending upon whether they have taken the necessary steps to attach and perfect a security interest in the goods they’ve sold.

Secured creditors can sometimes have their collateral returned to them, though this process has some limitations and requires very quick action.  It also has very strict requirements that the debtor (customer) have been insolvent and the goods be delivered within 45 days before bankruptcy. A specific written demand for the goods must also be made within 45 days of delivery or within 20 days after bankruptcy if the 45 days expired after the declaration.  Chapter 2 of the the Uniform Commercial Code may also provide rights to reclaim goods. We’ll discuss these options in a future post.

It can often be difficult to reclaim specific goods, but a secured creditor still has a claim for the value secured by those goods if they are liquidated by the trustee in the course of the bankruptcy and in satisfaction of other secured debts. (If the value of secured collateral is insufficient to cover the amount owed, creditors become unsecured creditors for the balance due.) Because of the value of remaining assets when a company enters liquidation, unsecured creditors often receive only pennies on the dollar, if they receive anything at all.

Under a Chapter 11 filing the organization remains in operation and under management’s control, but major decisions must be approved by the Bankruptcy court. Rather than liquidate all assets in satisfaction of outstanding debts, a committee of unsecured creditors will be formed to develop a plan to allow the company to eliminate part of its debt to regain its financial footing. Committees representing secured creditors, stockholders, and other interested parties may also be formed. The plan the committees develop specify classes of claims and how those claims are to be treated, in addition to numerous other considerations to enable the company to continue to function.

Under Chapter 11, aircraft parts subject to a security interest may also be subject to special treatment. A customer filing under Chapter 11 may be preferable to Chapter 7 for a distributor who is unsecured because although the full amount owed may not be paid, partial payments may be made to encourage the distributor (and other suppliers) to continue selling to the company to allow it to operate. On the other hand, a distributor with a security interest in aircraft parts may have the right to take possession of the collateral or be assured of payment under the security agreement.

Being a secured creditor is always preferable to being unsecured. It puts the creditor in a position to reclaim its collateral or get paid to the greatest extent possible. Unsecured creditors are often left with significantly diminished claims if they receive anything at all.  In our next article, we’ll talk about the steps you need to take to attach a security interest to the parts you sell.

Bankruptcy is confusing and can be fast-moving, and we haven’t even scratched the surface here. Always be sure to consult a bankruptcy attorney if you have a customer file for bankruptcy that owes you a significant amount.

This post has been updated for clarity.

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Report: Hawker Beechcraft Readies Bankruptcy Filing

March 28, 2012 by Leave a comment

Reuters is reporting that Hawker Beechcraft is preparing to file for bankruptcy protection in the next few weeks.

According to the report, Hawker is negotiating a prearranged bankruptcy with its largest lenders, which include Centerbridge Partners, Angelo Gordon and Capital Research & Management.

Bloomberg News had reported yesterday that Hawker had struck a deal with lenders that would have provided it with a $120 million loan as it negotiated with creditors to avoid default.

Hawker had been purchased by Goldman Sachs Group Inc’s private equity arm and Onex Corp. (another private equity firm) in 2007 for $3.3 billion.

ASA members doing business with Hawker may want to consult with a bankruptcy attorney concerning strategies for protecting any extensions of credit, as well as for protecting recent payments from claims of preference.

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AMR Files for Bankruptcy (Restructuring): Tips and Data You Need To Know

November 30, 2011 by Leave a comment

Two months ago, we warned that American Airlines’ parent company (AMR) appeared to be headed for bankruptcy, and recommended that ASA’s members take steps to protect their companies from the adverse affects of a potential customer bankruptcy.  It should have come as no surprise to anyone that yesterday, American Airlines parent company, AMR, filed for bankruptcy protection under Chapter 11 of the bankruptcy code.

This is a restructuring, so it is expected that AMR will emerge form the restructuring.  Most aircraft parts are sold to airlines on credit, so many ASA members may have concerns about their receivables owed by AMR.

It is normal during restructuring for post-filing transactions to receive a preference in the payment scheme.  So if you sell AMR an aircraft component the day after the bankruptcy , then you are much more likely to get paid 100% of the transaction price than if you had sold the  same part the day before the bankruptcy petition was filed.

Existing creditors may receive only a percentage of the amounts owed them or they may receive all of their outstanding receivables from AMR depending on the nature of the debt and the negotiations with the bankruptcy trustee.  The bankruptcy trustee has the power to terminate contracts that are not favorable to AMR, and it has the power to make deals with irreplaceable vendors who demand payment of prior receivables in exchange for continued service.  If you have a very large receivable outstanding with AMR, or if you have an ongoing relationship with AMR, then you should seriously consider hiring bankruptcy counsel with experience in negotiating post-filing remedies.

Supplier and vendor inquiries are being routed through the Trading Partners Response Center (TPRC).  You can call that response center at (866) 736-9011 (toll-free from the United States) or (703) 286-2757 (international toll).

For questions pertaining to the administration of this Chapter 11 case, you can contact AMR’s bankruptcy claims administrator, GCG, at:

AMR Corporation, et al.
c/o GCG
P.O. Box 9852
Dublin, Ohio 43107-5752
Toll-Free: (888) 285-9438
International Toll: (440) 389-7498
Email: amrcaseinfo@gcginc.com
Website: http://www.gcginc.com/

These contacts represent the best interests of the AMR estate, so if you have serious legal questions, or need to discuss strategies for defending your right to get paid, then you should seek the counsel of a qualified bankruptcy attorney.

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airBaltic Petitions for Legal Protection, but is Denied

September 26, 2011 by Leave a comment

Despite a steady increase in passengers since the beginning of the year, airBaltic  filed for legal protection (similar but not identical to bankruptcy protection) in an attempt to influence infighting between the company’s two biggest shareholders.  In response, the Court denied their request for legal protection.

In April 2010, Baltic Aviation Systems (BAS), 47.2% private shareholders in airBaltic, decided to increase their capital share in the airline. The Latvian government, which owns 52.6% of airBaltic, felt the only way to keep the airline from facing bankruptcy was by getting aid from the state, which Latvia’s Prime Minister, Valdis Dombrovskis, indicated would not happen if Bertolt Flick, President and CEO of airBaltic, remained at his position.

Over the months since, the two shareholders have been in a stalemate.

According to Flick, the Latvian government has “neglectfully and repeatedly delayed any decisions regarding the capital increase.”  He claimed that after BAS agreed to all government conditions on September 16, the government delayed decision-making once again by “suddenly and surprisingly” announcing the “potential sale of its shares in the airline”.

The plan for airBaltic’s continued operations would have included a nominated administrator, akin to a bankruptcy trustee, to be “responsible for the legal protection plan that all parties have to follow, including the shareholders, the management, and the Supervisory Board.”   airBaltic claimed this would have prevented the Latvian government from having any say in future decision-making while keeping the management of the airline the same.  The Court appears to have rejected airBaltic’s petition because airBaltic is having a conflict among its owners but does not appear to be insolvent and therefore does not need this legal protection.

The airBaltic fleet currently consists of 34 aircraft:

  • 2 Boeing 757-200,
  • 6 Boeing 737-500s,
  • 8 Boeing 737-300,
  • 10 Fokker-50s and
  • 8 Bombardier Q400 NextGen

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