We reported on Friday how the Third Circuit, despite the Supreme Court’s Purdue decision, upheld nonconsensual, nondebtor releases in the Boy Scouts of America’s chapter 11 plan because Section 363(m) meant that confirmation was statutorily moot.

Today, we describe how Circuit Judge Cheryl Ann Krause decided in her May 13 majority opinion that confirmation was not equitably moot and how she ruled on the appeals by the two insurers whose appeals avoided statutory mootness. Tomorrow, we will describe how Circuit Judge Marjorie O. Rendell effectively dissented by coming to the conclusion that all appeals should have been held to be equitably moot.

The Evolution of Equitable Mootness

Judge Krause began her discussion of equitable mootness by mentioning how the doctrine became law in the Third Circuit “by a slim margin.” Indeed, it was the slimmest of margins. Equitable mootness was adopted by a 7/6 en banc decision in In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc). The dissenting opinion was written by then-Circuit Judge (now Justice) Samuel A. Alito, Jr.

Citing her concurrence in a 2015 Third Circuit decision and a dissent in the Sixth Circuit, Judge Krause said that the “doctrine [of equitable mootness] is not without its critics.” The Boy Scouts case, she said, “highlights a potentially troubling aspect of adherence to the doctrine,” because “Congress took great care to define the circumstances where appellate remedies are unavailable, see 11 U.S.C. §§ 363(m) [and] 364(e).”

Listing four denials of certiorari between 2016 and 2023, Judge Krause said that “the Supreme Court has yet to consider the question [of equitable mootness] — and not for lack of opportunity.”

Mentioning how “[o]ur criteria for invoking the doctrine have shifted over time,” Judge Krause said that invocation of equitable mootness requires a substantially consummated plan and a showing that relief on appeal would “‘(a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.’”

Substantial Consummation

Judge Krause was not called upon to apply equitable mootness to the tort claimants because she had already dismissed their appeals for being statutorily moot. The insurance companies that had also taken appeals were not attempting to overturn the plan entirely, thus raising the question of equitable mootness as to their appeals.

First, Judge Krause inquired as to whether the plan had been substantially consummated given that the settling insurance companies had paid $200 million into the trust and had placed another $1.4 billion into escrow. Local scout councils, she said, had turned over $439 million of their required $500 million. She said that the payments into escrow by the insurers “qualifies as a ‘transfer.’”

Plan distributions had already begun, with $18.5 million having been distributed to some 5,500 claimants. Judge Krause concluded that substantial consummation, the first prong of equitable mootness, had been shown.

Having found substantial consummation, Judge Krause turned to the question of whether the insurance companies’ appeals would “imperil[] the Plan’s success.” She said that the two insurers “do not seek invalidation of the releases; instead, they ask us to grant them each narrow, cabined relief.”

At the conclusion of her decision on equitable mootness, Judge Krause dropped another pregnant footnote. Not having applied equitable mootness to the appeals by the tort claimants, she said, “should not be read, by negative implication or otherwise, to suggest that those claims are equitably moot.”

Judge Krause said that “we need not resolve whether” the appeals by the tort claimants are not equitably moot in view of the fact that settling insurers had “nearly $1.5 billion” in escrow that could be recovered were there a reversal of confirmation.

Given the narrow relief that the insurers sought on appeal, Judge Krause decided against dismissing the appeals as equitably moot and therefore turned to the merits of the insurers’ two appeals.

The Merits

With regard to one of the appealing insurers, Judge Krause said that the plan left that insurer’s “contractual rights and defenses intact.” She rejected that insurer’s appeal for more protection in the plan because “we decline to rewrite the Plan and fasten suspenders to this already well-secured belt.”

The appeal by the second group of insurers was another matter. Relying on Purdue, those insurers complained that the plan “non-consensually release[d] their claims and vitiate[d] their ability to recover certain defense costs.” Specifically, they argued that the plan “impermissibly releases and enjoins contribution and indemnity claims they could otherwise assert against the Settling Insurers.”

Judge Krause determined that the plan in fact would not enable the appealing insurers to recover the full amount of their indemnification and contribution claims from the settling insurers. She “therefore conclude[d] that Purdue controls, and the judgment reduction provision is unlawful insofar as it operates to extinguish the [appealing insurers’] claims without their consent.”

As she had done pages earlier in a footnote, Judge Krause said in her conclusion,

If proposed today, the Plan would be unconfirmable in the wake of Purdue and the [tort claimants] could not have their claims released without their consent. And that temporal happenstance, we recognize, is a bitter pill to swallow, “but bankruptcy inevitably creates harsh results for some players.” In re Weinstein Co. Holdings LLC, 997 F.3d 497, 511 (3d Cir. 2021).

Judge Krause reversed and remanded with instructions for the bankruptcy court to modify the confirmation order as requested by the appealing insurers whose contributions rights were cut off.