With a minor modification, the Third Circuit upheld confirmation of the Boy Scouts of America’s chapter 11 plan and its nonconsensual, nondebtor, third-party releases that would no longer be permissible following the Supreme Court’s Purdue decision, which came down while BSA’s appeal was pending in the circuit.

In a 62-page opinion on May 13, Circuit Judge Cheryl Ann Krause decided that the Boy Scouts’ plan was not equitably moot, even though the plan was substantially consummated. Nonetheless, she upheld the plan by ruling that confirmation of the plan was statutorily moot under Section 363(m) because insurance companies bought back their policies from the debtor.

“If proposed today,” Judge Krause said, “the [BSA] Plan would be unconfirmable in the wake of Purdue.” In other words, Section 363(m) allowed implementation of a plan that the Supreme Court no longer permits.

Circuit Judge Marjorie O. Rendell wrote a 16-page concurring opinion that reads like a dissent. In her view, the plan was not statutorily moot under Section 363(m). She would have reached the same result and upheld confirmation given her belief that the appeal was equitably moot. In other words, the judges were split on equitable mootness.

The Third Circuit’s Boy Scouts decision ranks in importance with opinions from the Supreme Court and covers more territory than a typical Supreme Court decision. Given the breadth of the BSA decision, we will report today on Section 363(m), because statutory mootness was the principal basis for upholding confirmation. Subsequently, we will describe why the majority decided that equitable mootness did not require dismissal of the appeal. Separately, we will report the concurrence by Judge Rendell.

Will Section 363(m) become a workaround to permit nonconsensual, nondebtor releases? Will equitable mootness survive a trip to the Supreme Court?

The Insurance Policy Buyback

Laying out the facts and the plan in detail, Judge Krause said that the Boy Scouts had paid $150 million by 2019 to resolve 250 sexual abuse suits. When it became evident that the organization could not defend the suits individually, the Boy Scouts filed a chapter 11 petition in Delaware in early 2020. When the deadline for claims arrived, there were over 82,000 claims with a maximum value of $3.6 billion.

With help from mediation, the debtor constructed a plan with a trust funded by almost $2.5 billion in “noncontingent assets.” The largest chunk, $1.6 billion, would come from insurance companies buying back their policies. In return for the $1.6 billion, the sale agreements required the insurers to have a “complete release” from abuse claims. Judge Krause described them as “nonconsensual third-party releases.”

All nine classes of voting creditors were in favor of the plan. Dealing with objections, the bankruptcy court held a 22-day confirmation trial, heard from 26 witnesses and took more than 1,000 exhibits. The bankruptcy judge wrote a 269-page opinion confirming the plan in July 2022.

The district court upheld confirmation in a 155-page opinion in March 2023, given that nondebtor releases were permissible under Third Circuit precedent. National Union Fire Insurance Co. of Pittsburgh v. Boy Scouts of America (In re Boy Scouts of America), 650 B.R. 8 (D. Del. March 28, 2023). To read ABI’s report, click here.

Two groups of creditors with sexual abuse claims appealed, asking the Third Circuit to set aside confirmation altogether under the authority of Purdue, among other theories. Two insurance companies also appealed, seeking more narrow relief that would not overturn the entire plan.

Purdue came down from the Supreme Court in June 2024, after the district court’s affirmance. The Third Circuit heard argument in the Boy Scouts’ appeal in November 2024, following Purdue.

Jurisdiction

On the merits, Judge Krause first established that the bankruptcy court had “related to” jurisdiction to impose nondebtor releases. In the Third Circuit, the existence of “related to” jurisdiction turns on whether the outcome could have a “conceivable” effect on the bankruptcy estate.

Judge Krause had little difficulty finding effects on the estate. Were tort claimants at liberty to sue insurers, the pool of coverage would be reduced, leaving the Boy Scouts with less insurance to pay claims. Likewise, the Scouts had indemnity obligations to nondebtors that would arise were there lawsuits against nondebtors.

Finding conceivable effects, Judge Krause held that “the Bankruptcy Court properly exercised related-to jurisdiction over these third-party claims.”

Statutory Mootness

The debtor’s “first argument” to uphold confirmation, Judge Krause said, was based on statutory mootness under Section 363(m). The subsection reads:

The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

If other prerequisites for the application of Section 363(m) are present, Judge Krause said that the court cannot declare a sale moot if there is relief that would not affect the validity of the sale. On the other hand, if appellate relief “would necessarily affect the sale’s validity, the relief is unavailable, so the appeal must be dismissed.”

Quoting Third Circuit authority, Judge Krause said that the subsection “does not prohibit the appeal of challenges to all sales and leases, but ‘only those challenges that would claw back the sale from a good-faith purchaser.’”

With regard to the appeals mounted by the two insurance companies, Judge Krause said they were not challenging the validity of the insurance policy buyback. Therefore, she said, “§ 363(m) poses no barrier to our consideration of the merits of their appeal.”

It was a different story for the tort claimants aiming to overturn the entire plan. For them, Judge Krause had “little difficulty concluding that the relief they seek would affect the validity of the Insurance Policy Buyback authorized by the Confirmation Order” because they wanted to “vacate the Plan in its entirety” and in the process unwind “the sale of BSA’s insurance policies.”

Whether the sale of the insurance policies had actually occurred was a bone of contention, because most of the price paid by the insurance companies was being held in escrow until confirmation was upheld by a final order no longer subject to appeal. Judge Krause rejected the argument, saying that “the fact that every last cent has not been handed over does not mean a sale has not occurred.”

Judge Krause also rejected the argument that Section 363(m) did not apply because the sale was part of a plan, not a freestanding sale. She said that the Third Circuit had “dispatched this argument years ago.”

The tort claimants contended that they were not seeking to overturn the sale, only the nondebtor releases. Judge Krause dismissed the contention, saying that “the Settling Insurers would receive less than they bargained for in exchange for their cash contribution to the Settlement Trust, which ‘would materially increase . . . the purchase price.’”

Of perhaps more substance, the tort claimants argued that statutory mootness would immunize plans from appellate review whenever a plan was combined with a sale. Judge Krause responded as follows:

Our decision does not read § 363(m) to immunize from appellate review all facets of a plan whenever a § 363(b) sale is involved. Put differently, a challenge to a § 363(b) sale that is “collateral” to or would not otherwise “affect the validity of the sale” falls outside the ambit of § 363(m) [citation omitted], and given the breadth of issues a reorganization plan may resolve that do not necessarily implicate the terms of a § 363(b) sale, see 11 U.S.C. § 1123(a) – (b), the vast majority of challenges, no doubt, will fall into this category.

Applying the principles to the case on appeal, Judge Krause said that “the nonconsensual third-party releases challenged by the [tort] Claimants go to the heart of the Bankruptcy Court’s § 363(b) authorization, so § 363(m) prevents us from disrupting them on appeal.”

Judge Krause dismissed the appeal by the tort claimants who “would strike at the heart of the Insurance Policy Buyback.” The appeals by the insurance companies were in a different category that escaped dismissal because they were “collateral to the Insurance Policy Buyback.”

At the conclusion of the discussion of statutory mootness, Judge Krause dropped a footnote that ranks as perhaps the most significant statement in the opinion.

It was an “unusual case,” Judge Krause said, because the Supreme Court handed down Purdue and “abrogate[d] our precedent on that issue” while the appeal was pending. “So were the Plan proposed today,” she said, “we harbor little doubt that the Bankruptcy Court would neither authorize the Insurance Policy Buyback nor confirm the Plan with its impermissible releases.”

Next

On Monday, we will explain why Judge Krause decided that the appeal was not equitably moot as to the insurance companies who were appealing. She dismissed the appeal as statutorily moot as to the tort claimants who wanted to overturn confirmation altogether.

Question

Assume there’s another mass tort case where confirmation requires an insurance buyback, but the insurers refuse to buy back their policies without nonconsensual, nondebtor releases. Are we certain that no bankruptcy court will ever confirm such a plan and that an appellate court won’t dismiss the appeal as statutorily moot? Does Section 363(m) override Supreme Court precedent?