JACK COSTELLO—The Supreme Court declined to halt a bankruptcy settlement for the Boy Scouts of America, rejecting an Application for a Stay of the Bankruptcy Plan posited by 144 victims of the national organization’s child sexual abuse scandal. The Court’s decision lifted a temporary order, which had temporarily blocked the settlement from moving forward while the nation’s highest court considered the legal arguments asserted by the abuse claimants. By lifting the temporary order, an appeal of the Boy Scouts of America’s settlement will proceed in the U.S. Third Circuit Court of Appeals, with arguments scheduled to begin on April 9, 2024.
Boy Scouts of America’s Chapter 11 plan was previously confirmed by the United States Bankruptcy Court for the District of Delaware and affirmed by the United States District Court for the District of Delaware. The settlement, which would resolve all global abuse claims against Boy Scouts of America and related entities, created the largest sexual abuse compensation fund in the history of the United States. Through contributions to the compensation fund, individual abuse victims would receive between $3,500 and $2.7 million.
An appeal of the confirmation of the Boy Scouts of America’s bankruptcy plan is currently pending in the Third Circuit. There, appellants are arguing that a bankruptcy court lacks the authority to approve nonconsensual third-party releases of claims against nondebtors, which includes over 300,000 Chartered Organizations, Local Councils, and their respective representatives and insurers. Accordingly, the Third Circuit will have to consider whether the bankruptcy court properly possessed jurisdiction over direct third-party claims against nondebtors and if statutory authority to grant nondebtor releases exists under the current Bankruptcy Code.
However, on February 9, 2024, 144 of the over 82,000 men who claimed to be abused as children by troop leaders sought an emergency administrative order to freeze the $2.46 billion settlement with the Boy Scouts of America. Although 86% of claimants supported the settlement when the plan was approved in bankruptcy court, a small group of claimants argued that the current settlement plan deprives victims of pursuing causes of action against non-bankrupt, third-party organizations that ignored decades of sexual abuse. The prospect of halting the settlement was not well received by some abuse survivors, for victims have been waiting decades to obtain legal remedies for the sexual abuse they endured.
Notably, the handful of claimants insisted that the bankruptcy settlement should be stayed until the Supreme Court reaches a decision in an appeal concerning OxyContin manufacturer Purdue Pharma. In Harrington v. Purdue Pharma L.P., the federal government and a small group of victims are objecting to the former pharmaceutical titan’s bankruptcy plan, arguing that the plan unjustly grants Purdue Pharma’s owners and related entities immunity from further civil liability for their respective roles in the opioid epidemic. Boy Scouts of America had previously filed an amicus brief in the case, urging the Second Circuit to make clear that Purdue Pharma’s case would not affect other Chapter 11 bankruptcy plans that had already become effective. Counsel for the youth organization additionally argued that nonconsensual third-party releases were not only permissible under the Bankruptcy Code, but they were essential to enabling Boy Scouts of America to emerge from bankruptcy.
With Purdue Pharma now before the Supreme Court, Justices appeared conflicted during oral arguments as to whether U.S. bankruptcy law allows for such vast legal protections afforded to the Sackler family, the members of which have not personally filed for bankruptcy. The Supreme Court previously granted an administrative stay of Purdue Pharma’s bankruptcy plan, halting the Chapter 11 reorganization while the federal government appeals. Consequently, the handful of abuse claimants in Boy Scouts of America emphasized that an administrative stay would be proper, given that resolution of Purdue Pharma’s appeal will likely determine whether bankruptcy courts can wipe away claims against non-bankrupt, non-debtors. Although the Supreme Court denied the sexual abuse victim’s application in an unsigned order, the decision to lift the temporary order seemingly aligns with the judicially created equitable mootness doctrine and a desire to avoid inequity. Appellate courts have generally applied the doctrine of equitable mootness in refusing to disrupt complex Chapter 11 bankruptcy cases when third parties have relied on the finality of the plans and the debtor’s emergence from bankruptcy.
Consequently, the bankruptcy legal issues now present before the Third Circuit in Boy Scouts of America will undoubtedly overlap with issues under consideration by the Supreme Court in Purdue Pharma. Although the high court’s refusal to grant an administrative stay on Boy Scouts of America’s bankruptcy plan is consistent with the judicial bankruptcy doctrine, it is difficult to see how resolution of Purdue Pharma would not affect the merits of the sexual abuse survivors’ appeal. As such, expect legal experts to keep a keen eye on how the respective courts weigh Bankruptcy Code arguments with the prospect of further delaying implementation of two of the largest and more complex bankruptcy settlements currently being processed in the nation’s courts.
