Background: BSA is a well-known nationally recognized nonprofit organization. To accomplish its mission, BSA relies on 250 Local Councils5 and tens of thousands Chartered Organizations6 to operate individual scout units at a local level. Prior to BSA filing its bankruptcy cases, BSA, Local Councils, and Chartered Organizations were named co-defendants in hundreds of lawsuits by certain plaintiffs alleging sexual abuse within the scouting ranks (“Abuse Claims”) since at least 1920. By October 19, 2020, BSA was a named defendant in approximately 275 lawsuits asserting sexual abuse. Furthermore, BSA was then aware of 1,400 other similar claims not yet the subject of lawsuits. From 2017–2019, BSA spent more than $150 million on fees and costs in addressing such Abuse Claims. On October 18, 2020, BSA filed chapter 11 bankruptcy cases in the Bankruptcy Court for the District of Delaware.
The Plan: The Plan proposes global resolution of Abuse Claims against the debtors, related non-debtor Entities,7 Local Councils, Contributing Chartered Organizations, Settling Insurance Companies, and their respective Representatives. The central features are based on the establishment of a settlement trust (the “Settlement Trust”) with certain trust assets to be contributed to it for the benefit of holders of Abuse Claims.8
The Plan’s Releases: The Plan contains three sets of releases: (1) releases by holders of Abuse Claims relating to scouting against Local Councils, Chartered Organizations, Settling Insurance Companies, and their respective Representatives (the “Scouting-Related Releases”); (2) unobjected-to releases of claims held by the debtors and their estates (which are not the subject of the Bankruptcy Court’s analysis) (the “Debtor Releases”); and (3) broad releases by holders of claims against all Released Parties from any claims existing before the Effective Date of the Plan related to the Debtors, their estates, or assets, whereby certain holders of claims were given an opportunity to opt-out of the third-party releases by way of ballots (if in a voting class) or by objecting to the Plan (if in a non-voting class) (the “Opt-Out Releases”) (collectively, the Opt-Out Releases and the Scouting-Related Releases, the “Third-Party Releases”).
Objections to the Releases: The Scouting-Related Releases were challenged by certain Direct Abuse Claimants and the United States Trustee (“UST”), who objected on grounds that: (1) the Bankruptcy Court lacks subject matter jurisdiction to approve third-party releases and (2) the Scouting-Related Releases are not fair and necessary as required by Third Circuit precedent set forth in In re Continental.9 Additionally, certain of the Direct Abuse Claimants objected solely to the third-party release of the Church of Jesus Christ of the Latter-Day Saints (the “TCJC”), arguing that releases for sexual abuse claims that were not Abuse Claims (i.e., sexual abuse claims independent of sexual abuse within the scouting ranks) should not be approved. The UST objected to the Opt-Out Releases and argued that the opt-out procedure did not result in consensual releases and violated due process rights. The UST also objected to the releases given by 22 categories of persons related to releasing parties,10 arguing that such parties would likely not have received adequate notice that they would be providing releases and therefore such releases should not be approved.
The Opinion
Jurisdiction: At the outset, Judge Silverstein found the requisite “arising in” jurisdiction over the confirmation proceeding and also “related to” jurisdiction to approve the Third-Party Releases due to the high degree of interrelatedness, and thus identity of interest, between the Debtors and the released parties.
Scouting-Related Releases: The Scouting-Related Releases in the Plan release claims that holders of Abuse Claims have against Local Councils, Chartered Organizations, Settling Insurance Companies, and their respective Representatives. The Bankruptcy Court found that these Scouting-Related Releases (with the exception of releases of all abuse allegations against TCJC described in more detail below) were appropriate and permissible and found the requisite statutory authority to approve them under sections 105(a),11 1123(a)(5),12 1123(b)(6),13 of the Bankruptcy Code. Judge Silverstein explained that because third-party releases are neither expressly authorized under the Bankruptcy Code nor inconsistent with other provisions of the Bankruptcy Code, In re Continental “aids the court in navigating between these two poles.”14
Before turning to whether the Scouting-Related Releases satisfied applicable Third Circuit precedent supporting their appropriateness in limited circumstances, Judge Silverstein set the stage for the analysis by describing the landscape of the case as well as the nature and scope of the releases at issue:
By any measure, the scope and sheer number of releases contemplated in this Plan is extraordinary, if not unprecedented. The Settling Insurers are being granted nonconsensual third-party releases as are Related Non-Debtor Entities, officers and directors and all their Representatives. Debtors also seek releases (full or partial) of 250 Local Councils and over 100,000 Chartered Organizations. But, with perhaps some exceptions, a holder of a Direct Abuse Claim is releasing one Local Council and one Chartered Organization. To be perfectly clear, Perpetrators are not receiving releases.
The size of the claimant pool is also unprecedented (so I am told), at least in the context of sexual abuse cases. The Direct Abuse Claimant pool total is 82,209 unique and timely filed claims. Comparatively, the actual number of parties objecting is few. Seven law firms representing 569 claimants’ and three claimants appearing pro se, object to the releases. While the absolute number of objectors is not insignificant, as a percentage of the Direct Abuse Claimants, they are less than one percent. Nothing in this Opinion is meant to minimize their strongly held positions.
The amount contributed to the Settlement Trust is the also unprecedented (so I am told).15
Judge Silverstein concluded that the Scouting-Related Releases satisfied the standard set forth in In re Continental because the releases were both fair and necessary to the reorganization. As to fairness, Judge Silverstein found relevant the following factors:
- The Plan is a 100% payment plan providing a mechanism for payment of all or substantially all Abuse Claims.
- The Plan provides for a timely assessment and payment of Direct Abuse Claims and equal treatment across claimants who will be assessed under the Trust Distribution Procedures.
- The Scouting-Related Releases are consistent with the way claimants historically sued and settled claims with BSA — as a group.
- Direct Abuse Claimants, as a class, accepted the Plan by over 85%, and given that there are 82,209 claimants, 85% represents an overwhelming acceptance.
- Without the Plan, litigation would result in either a race to the courthouse by claimants or a BSA-only bankruptcy plan resulting in a pennies-only recovery.
- In addition, survivors testified that the inclusion of negotiated Youth Protections in the Plan was a critical piece of bringing them justice and obtaining their approval of the Plan.
Regarding necessity, Judge Silverstein found that the Scouting-Related Releases were necessary to the reorganization to confirm the Plan and to ensure that BSA’s scouting program continues. She pointed out that the releases were the cornerstone of the Plan, which was premised on funding the Settlement Trust in full. Moreover, the releases made possible the inclusion in the trust of insurance assets worth up to another $4 billion plus, which could be accessed more quickly and definitively than without the Plan. Additionally, the undisputed evidence showed that without the releases for Local Councils and Chartered Organizations, BSA would likely suffer a drop in membership resulting in a drop in revenue, putting into question BSA’s ability to continue as a national organization. Finally, she noted that the Plan, supported by the Scouting-Related Releases, would minimize BSA’s involvement and permit it to focus on its mission.
As to the portion of the Scouting-Related Releases granted in favor of the TCJC for non-Abuse Claims, Judge Silverstein declined to approve such releases. Recognizing that she may still have jurisdiction over such claims, she concluded that: (i) it was unclear that the evidence supported granting of the releases and (ii) the settlement providing for such releases stretched the releases too far because such releases would cover sexual abuse claims against TCJC that were unrelated to scouting.
Opt-Out Releases: The Bankruptcy Court sustained in part and overruled in part the objections lodged by the UST regarding the Opt-Out Releases. The Plan provides that Releasing Claim Holders release all Released Parties from any claims existing before the Effective Date of the Plan related to the Debtors, their estates, or assets. To avoid providing a release, (a) a holder of a claim who votes on the Plan (for or against) must affirmatively opt-out by checking a box on the ballot, and (b) a holder of a claim in an unimpaired class must file an objection. However, no holder of a Claim in an Impaired Class under the Plan will be deemed to release claims to the extent such holder abstained from voting. Judge Silverstein found that these Opt-Out Releases were appropriate under the circumstances and that such claimants were not deprived of their due process rights. In making this determination, Judge Silverstein agreed with Judge Dorsey in Mallinckrodt that the issue is one of notice, and she therefore examined the extent of the notice of the Opt-Out Releases. She found abundant evidence in the record that holders of claims received sufficient notice of the proposed releases, which were prominently featured on the face of the ballot as well as in the disclosure statement among other places, including in widely disseminated published notices. She also noted that 2,200 claimants opted out of the releases, which evidences that claimants were given meaningful notice. However, as to the categories of persons related to releasing parties that are also purported to be providing releases, the Bankruptcy Court agreed with the UST and declined to find that such related parties received notice and thus did not approve the Opt-Out Releases as to those related parties.
Summary of key takeaways
Despite another recent decision from a Delaware bankruptcy court approving third-party releases, lack of uniformity on the issue still persists, given the conflicting case law in the District Court for the Southern District of New York (presently on appeal in the Second Circuit) and the District Court in the Eastern District of Virginia in the Fourth Circuit, where both courts invalidated third-party releases by putting into question the constitutional and/or statutory authority that bankruptcy courts have to approve such releases.
The issue of third-party releases is a significant, and often central, issue for all constituencies. It is common practice for parties to use and rely on third-party releases to maximize value to the estate and enhance creditor recoveries. However, the uncertainty as to whether third-party releases are constitutionally and statutorily authorized currently brings unpredictability and ambiguity to settlements and deal-making.
For now, it is only a matter of time until we find out whether these important and contentious issues ultimately will be resolved by our nation’s highest court or perhaps through federal legislation.
1 In re Boy Scouts of America and Delaware BSA, LLC., Case No. 20-10343-LSS, 2022 WL 3030138 (Bankr. D. Del. July 29, 2022) (the “Opinion”). While Judge Silverstein approved major components of the Plan, she neither confirmed nor denied confirmation of the Plan. Given the lack of a definitive ruling on confirmation, the Court invited the Debtors to make decisions regarding the Plan and to schedule a status conference with the Court to determine how to proceed. On August 12, 2022, the Debtors filed an amended Plan and proposed Confirmation Order, both of which have been modified in a manner consistent with the Opinion. (Docket Nos. 10188 and 10190). The Debtors also filed a corresponding motion requesting to amend and supplement the findings of fact and conclusions of law in the Opinion by entry of the revised Confirmation Order approving the modified Plan. (Docket Nos. 10188 and 10190). The hearing on the motion to amend the Plan is set for September 1, 2022.
2 In re Mallinckrodt PLC., Case No. 20-12522 (JTD), 2022 WL 334245 (Bankr. D. Del. Feb. 03, 2022). For more information on the Mallinckrodt decision, third-party releases in general, and the “opt-in” versus “opt-out” debate, see In re Mallinckrodt PLC.: Delaware Bankruptcy Court Approves Non-Consensual Third-Party Releases in Contrast to Purdue and Ascena, VELaw.com (Feb. 14, 2022), https://www.velaw.com/insights/in-re-mallinckrodt-plc-delaware-bankruptcy-court-approves-non-consensual-third-party-releases-in-contrast-to-purdue-and-ascena/.
3 In re Purdue Pharma, L.P., 635 B.R. 26 (S.D.N.Y. 2021). For more information on the Purdue ruling and third-party releases in general, see In re Purdue Pharma L.P.: S.D.N.Y. Holds Bankruptcy Court Lacks Statutory Authority to Approve Sackler Family Releases, VELaw.com (Dec. 28, 2021), https://www.velaw.com/insights/in-re-purdue-pharma-l-p-s-d-n-y-holds-bankruptcy-court-lacks-statutory-authority-to-approve-sackler-family-releases/. In Purdue, the United States District Court for the Southern District of New York vacated Purdue’s plan of reorganization on the basis that the bankruptcy court did not have statutory authority to approve the non-debtor third-party releases contemplated therein. The plan proponents appealed that decision to the Second Circuit, which held oral argument on the matter on April 29, 2022. The appeal remains pending.
4 Patterson v. Mahwah Bergen Retail Grp., Inc., 636 B.R. 641 (E.D. Va. 2022). For more information on the Ascena ruling, third-party releases in general, and the “opt-in” versus “opt-out” debate, see District Court in Virginia Continues Questioning of Third-Party Releases – At Least in the Absence of Detailed Findings of Necessity, VELaw.com (Jan. 25, 2022), https://www.velaw.com/insights/district-court-in-virginia-continues-questioning-of-third-party-releases-at-least-in-the-absence-of-detailed-findings-of-necessity/.
5 “Local Councils” have jurisdiction over a set geographical area within the United States. Each Local Council is a separate, independent non-profit entity organized under the laws of the Local Council’s respective state, but consistent with BSA’s Bylaws and Rules and Regulations. Each Local Council is responsible for its own operations, including programming, fundraising, and recruiting membership into the scouting program.
6 “Chartered Organizations” are religious, civic, or community institutions that work directly with Local Councils to help deliver scouting in their respective communities. Generally speaking, Chartered Organizations provide facilities for scout meetings and other infrastructure at the local level as well as provide assistance with selecting troop leaders and volunteers.
7 Capitalized terms used but not otherwise defined herein retain the meanings given to them in the Opinion.
8 All Abuse Claims are channeled to the trust under the Plan, whether they are Direct Abuse Claims (classified in class 8) (“Direct Abuse Claims”) held by individuals for Abuse or Indirect Abuse Claims (classified in class 9) (“Indirect Abuse Claims”) held by insurance companies, Local Councils, or Chartered Organizations for contribution, indemnity, reimbursement, or subrogation.
9 In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000).
10 Such parties are “predecessors, successors and assigns, subsidiaries, affiliates, current and former officers, directors, principals, shareholders, members, partners, employees, agents, advisory board members, financial advisors, attorneys, accountants, investment bankers, consultants, representatives, management companies, and other professionals, and all such Persons’ respective heirs, executors, estates, servants and nominees, in their respective capacities as such.” Opinion at *126.
11 “The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. . . .” 11 U.S.C. § 105(a).
12 “Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . provide adequate means for the plan’s implementation . . . .” 11 U.S.C. § 1123(a)(5).
13 “[A] plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.” 11 U.S.C. § 1123(b)(6).
14 In response to certain objectors’ arguments that the inclusion of section 524(g) in the Bankruptcy Code suggests that third-party releases are not appropriate in a non-asbestos context, Judge Silverstein pointed to a rule of construction contained in section 524(h) which provides that “nothing in [subsection 524(g) and (h)] shall be construed to modify, impair, or supersede any other authority the court has to issue injunctions in connection with an order confirming a plan of reorganization.” By its express language then, according to Judge Silverstein, section 524(g) does not prohibit the granting of third-party releases in the non-asbestos context. Opinion at *62.
15 Opinion at *63 (emphasis added).
