The United States District Court for the District of Delaware recently affirmed the Bankruptcy Court’s confirmation of the Plan of Reorganization proposed by the Boy Scouts of America, which provides for approximately $2.46 billion to be contributed to a Settlement Trust for the benefit of over 80,000 abuse claimants, over objections by 15 non-settling insurance companies (“Non-Settling Insurers”) and certain other claimants. See In re Boy Scouts of Am. & Delaware BSA, LLC, No. 20-10343-LSS, 2023 WL 2662992 (D. Del. Mar. 28, 2023). The decision is noteworthy as it approves broad non-debtor third party releases to as many as 100,000 non-debtor parties, despite recent rulings in Purdue¹ and Ascena Retail Group, Inc.² in a different circuit, finding that bankruptcy courts do not have authority to issue such third party releases. Further, the District Court overruled objections by Non-Settling Insurers that the Plan abrogated insurers’ rights and the insureds’ obligations under the applicable insurance policies, even though those specific rights and obligations were not expressly provided for in the Plan. The decision also dismissed allegations that the Plan was proposed in bad faith because, among other things, (i) abuse claims that would otherwise be barred by the statute of limitations could receive a distribution from the Settlement Trust, and (ii) the Plan allegedly bound Non-Settling Insurers to inflated claim payments and deprived insurers of the ability to challenge the determinations on claims.

Summary of Decision

On March 27, 2023, the District Court affirmed on appeal the Third Modified Fifth Amended Plan Of Reorganization (the “Plan”), proposed by the Boy Scouts of America (“BSA), which Plan was confirmed in 2022 by the Bankruptcy Court, following 22 days of hearings and seven days of oral argument. The District Court decision overruled the objections of the Non-Settling Insurers and two relatively small groups (the “Claimants’ Groups”) of alleged abuse victims (“Abuse Claimants”). 

In its opinion, the District Court agreed with the Bankruptcy Court that the case is “extraordinary,” best exemplified by contributions totaling approximately $2.46 billion to a settlement trust (the “Settlement Trust”) for Abuse Claimants, and the resolution of significant issues by and between (i) the BSA (who is contributing approximately $100 million in cash and property to the Settlement Trust), (ii) the BSA’s 251 Local Councils (contributing cash and property not less than $515 million), (iii) five insurance carriers (the “Settling Insurers,” contributing nearly $1.7 billion), (iv) the Methodist Church (contributing $30 million) and (v) approximately 80,000 current and former chartered organizations (the “Chartering Organizations,” whose insurance rights are contributed to the Settlement Trust for the benefit of Abuse Claimants). The BSA, the Local Councils and the Settling Insurers receive a release from all scouting related abuse claims. As to Chartering Organizations, except for the Methodist Church that receives a release from all scouting related abuse claims, all other Chartering Organizations receive a release of claims that arose after January 1, 1976, and a release of claims insured by the Settling Insurers that arose before 1976. 

In the introductory comments, the District Court stated:

The Plan embodies a global resolution of Scouting-related sexual abuse (“Abuse”) claims. The cornerstone of the Plan is a series of settlements resolving a complex array of overlapping liabilities and insurance rights, that will establish what is apparently the largest sexual abuse compensation fund in the history of the United States – the Settlement Trust. These settlements are the product of nearly two years of mediation and provide at least $2.46 billion in cash and property to the Settlement Trust benefitting Abuse Survivors, plus significant unliquidated assets, including valuable insurance rights worth up to another $4 billion plus ….  The Plan “channels” to the Settlement Trust all Abuse Claims against BSA, the Related-Non-Debtor Entities, the Local Councils, certain Chartered Organizations, and those covered by insurance policies issued by the Settling Insurance Companies and provides for co-extensive nonconsensual releases of the channeled Abuse Claims. The channeled Abuse Claims will be processed, liquidated, and paid by the Settlement Trust in accordance with the Settlement Trust Agreement and Trust Distribution Procedures.

In re Boy Scouts of Am., 2023 WL 2662992 at *1.

The 17 Appellants filed appeals and argued for reversal of Bankruptcy Court’s order confirming the BSA Plan. The District Court, however, found that the Appellants had failed to demonstrate “clear error” in the Bankruptcy Court’s “careful” findings of fact, and also held that there was “no error” in the Bankruptcy Court’s legal conclusions.  As is the case with the Bankruptcy Court’s 285-page opinion confirming the BSA Plan, the District Court’s 155-page opinion is detailed, addressing multiple issues, including the following:

i. Approval of Channeling Injunction and Third Party Releases

Over the objection of the two Claimants’ Groups, the District Court approved the Plan’s channeling injunction requiring Abuse Claimants to seek compensation from the Settlement Trust and approved releases to as many as 100,000 non-debtor parties, stating that “[t]he Channeling Injunction and Releases are the ‘cornerstone of the Plan,’ and are necessary to ensure an equitable process by which abuse Survivors’ Claims will be administered and paid.” In re Boy Scouts of Am., 2023 WL 2662992 at *1. 

More specifically the District Court concluded that “the Bankruptcy Court had … ‘related to’ jurisdiction over the claims at issue” based on (a) a clear identity of interest based on the interconnectedness between BSA and the parties released; (b) shared insurance coverage among BSA, the Local Councils and the Chartering Organizations; (c) contractual indemnification obligations among the BSA, Local Councils and certain of the other released parties including Chartering Organizations; and (d) BSA’s residual interest in all Local Council property in the event of a Local Council’s dissolution or a revocation of its charter.  Id. at **18-19.  Accordingly, the District Court found that the Bankruptcy Court correctly determined that it had jurisdictional and statutory authority to approve the third-party releases to non-debtors, noting that the Third Circuit, courts within the Third Circuit, and other courts outside the Third Circuit “have recognized the statutory authority of Bankruptcy Courts to issue nonconsensual third-party releases under appropriate circumstances,” where “the releases are integral to the debtor’s reorganization.”  Id. at *26. The BSA was able to assemble the approximate $2.46 billion of contributions to the Settlement Trust for Abuse Claimants, specifically because of the releases given to the BSA, the BSA’s 251 Local Councils, five settling insurance carriers, the Methodist Church and the 80,000 Chartering Organizations. Without the third party releases, and the contribution of Chartering Organizations’ insurance rights, neither the Local Councils, nor the five insurance carriers, nor the Methodist Church, would have contributed to the Settlement Trust. 

ii. Ability to Assign Non-Settling Insurers’ Policies to the Settlement Trust

In response to the arguments asserted by the Non-Settling Insurers that the BSA had no right to assign their insurance policies to the Settlement Trust and that the insurers’ rights were abrogated by the Plan and its Trust Distribution Procedures, the District Court stated that the insurers failed to identify any authority standing for the proposition that insurance policies could not be assigned, finding that debtors “routinely” assign insurance policies in bankruptcy cases. The District Court also found that the Trust Distribution Procedures are “explicit” in not modifying the insurance policies and preserving the policy obligations as they existed prepetition, stating that:  (1) the “plain meaning” of the provisions within the Plan are clear that the insurers’ rights and obligations under the policies are preserved “to the extent such rights and obligations are otherwise available under applicable law”; and, (2) the “unrefuted evidence” is that the Trust Distribution Procedures were “designed to emulate, to the greatest extent practicable, the prepetition practice of the BSA and its insurance companies for investigating, evaluating, valuing, and resolving direct abuse claims, while simultaneously preserving all of the rights of the non-settling Insurance Companies to dispute and litigate coverage issues with the Settlement Trust.”  In re Boy Scouts of Am., 2023 WL 2662992 at *66.

iii. Finding Plan Proposed in Good Faith

The District Court also dismissed the Non-Settling Insurers’ argument that the BSA Plan was proposed in bad faith. The Non-Settling Insurers asserted that the BSA’s Plan had been proposed in bad faith, evidenced by: (1) the Plan allegedly binding the Non-Settling Insurers in covered litigation to inflated claim payments and depriving insurers of any means to challenge the determinations on claims; (2) the abrogation of statutes of limitations that arguably provide a defense to thousands of abuse claims; and, (3) and “explosion” of claims following the bankruptcy filing from 1,700 to over 80,000.  As to the allegation that the Plan bound Non-Settling Insurers to pay inflated claims, the District Court found “no support for the contention that the Plan requires Insurers to pay future inflated awards, noting that “the Bankruptcy Court held that Certain Insurers would not necessarily be bound by the awards issued by the Settlement Trust,” rather “a coverage court will determine whether awards are covered by any particular insurance policy to the extent that there is a dispute in the future about that matter. . . . ”  In re Boy Scouts of Am., 2023 WL 2662992 at *65.  As to the abrogation of statutes of limitations, the District Court explained that – although it is true that as set forth in the Trust Distribution Procedures, statutes of limitations were not a bar to a claimant asserting a claim – the Trust Distribution Procedures do utilize such statutes as a factor in determining (and arguably reducing) the allowed amount of claims, which the District Court determined was sufficient.  Finally, the District Court determined that the postpetition “explosion of claims” was not evidence of bad faith, and that the Plan includes numerous provisions for assessing the validity of claims, noting that one of the founding principles of the Trust Distribution Procedures is the “prevention and detection of any fraud.” In re Boy Scouts of Am., 2023 WL 2662992 at *69. In response to all of the argument that the Plan was proposed in bad faith, the District Court concluded:

Having considered 'the objective factors' highlighted by Certain Insurers – “the Plan itself and the process,” including whether it resulted from “fundamental fairness in dealing with the creditors,” achieved “fundamental fairness and justice,” “discouraged debtor misconduct,” and “whether the debtor has sought to step outside the equitable limitations of Chapter 11” …, I find no support for Certain Insurers’ allegations of BSA’s collusion, failure to negotiate, or the Plan’s inflation of claims at the expense of Certain Insurers’ rights and defenses. I further find no evidence demonstrating clear error in the factual findings underlying the bankruptcy court’s good faith determination.

Id. at *75.

iiii. Approval of Settling Insurers’ Settlement

The District Court also affirmed the Bankruptcy Court’s finding that the settlement with the Settling Insurers at nearly $1.7 billion was fair and appropriate, and that there was more than sufficient “evidence” presented at the confirmation hearing to support the Bankruptcy Court’s finding that Abuse Claimants likely would be paid in full when taking into account all funding sources.

Impact of Decision

In mass tort bankruptcies, especially those filed in the Delaware, debtors will likely rely on the District Court’s decision as a blue print on how to negotiate a settlement with tort claimants, obtain broad third party releases and bind non-settling insurers to the terms of a plan where insurers’ ability to challenge future distributions on claims allegedly covered by their policies is limited. 

The U.S. Court of Appeals for the Third Circuit, on April 19, 2023, denied emergency motions by Non-Settling Insurers and the Claimants’ Group for a stay pending appeal of the decision. Consequently, the BSA Plan went effective that same day, effectuating the broad third party releases and funding the Settlement Trust. The Non-Settling Insurers’ and the Claimants’ Group’s next move is unknown.  However, given that the Plan has now gone effective, any appeal of the decision may be considered moot. If that is the case, the District Court’s decision affirming confirmation of the BSA Plan will likely be the last word addressing these issues in this case. 

Consequently, this decision will likely provide debtors and tort claimants in mass tort bankruptcies with added leverage in negotiations with insurers to obtain larger contributions from insurers as part of global settlements.

[1] In re Purdue Pharma, L.P., 635 B.R. 26, 90 (D.N.Y. 2021).

[2] Patterson v. Mahwah Bergen Retail Grp., Inc., 636 B.R. 641 (E.D. Va. 2022).