Boy Scouts’ $2.4 billion bankruptcy plan upheld by judge

A federal district court judge has upheld the approval of a $2.4 billion bankruptcy reorganization plan aimed at resolving tens of thousands of child sexual abuse claims against the Boy Scouts of America.

The ruling docketed Tuesday rejects arguments by non-settling insurance companies and attorneys representing dissenting abuse survivors that the reorganization plan was not proposed in good faith and improperly strips the insurers and survivors of their rights.

The ruling follows a September decision in which U.S. Bankruptcy Judge Laurie Selber Silverstein approved the plan. The plan would allow the Irving, Texas-based Boy Scouts of America to continue operating while compensating tens of thousands of men who say they were sexually abused as children while involved in Scouting.

More than 80,000 men have filed claims saying they were abused as children by troop leaders around the country. Plan opponents say the staggering number of claims, when combined with other factors, suggests that the bankruptcy process was manipulated.

While affirming Silverstein’s description of the proceedings as “an extraordinary case by any measure,” U.S. District Court Judge Richard Andrews found no fault with her ruling.

“Appellants argue on many fronts that the plan did not meet the requirements for confirmation, and I have carefully considered each of these arguments,” Andrews wrote. “Based on the record, the appellants have failed to put forth evidence that would demonstrate clear error in the bankruptcy court’s careful findings of facts.”

The BSA issued a statement describing the ruling as “a pivotal milestone” that “solidifies a path forward for both survivors and Scouting.”

“We look forward to the organization’s exit from bankruptcy in the near future and firmly believe that the mission of Scouting will be preserved for future generations,” the statement added.

A spokesperson for attorneys representing several non-settling insurance companies had no immediate comment, but attorneys have previously suggested that the case could eventually reach the U.S. Supreme Court.

When it sought bankruptcy protection in February 2020, the BSA had been named in about 275 lawsuits and told insurers it was aware of another 1,400 claims. The huge number of claims filed in the bankruptcy was the result of a nationwide marketing effort by personal injury lawyers working with for-profit claims aggregators to drum up clients, according to plan opponents.

The BSA’s largest insurers negotiated settlements for a fraction of the billions of dollars in potential liability exposure they faced. Other insurers, many of which provided excess coverage above the liability limits of the underlying primary policies, refused to settle. They argued that the procedures for distributing funds from a proposed compensation trust would violate their contractual rights to contest claims, set a dangerous precedent for mass tort litigation, and result in grossly inflated payments.

They also noted that a plaintiffs’ attorney had acknowledged that some 58,000 claims probably could not be pursued in civil lawsuits because of the passage of time.

Under the plan, which the BSA describes as a “carefully calibrated compromise,” the BSA itself would contribute less than 10% of the proposed settlement fund. The local BSA councils, which run day-to-day operations for troops, offered to contribute at least $515 million in cash and property, conditioned on certain protections for local troop sponsoring organizations, including religious entities, civic associations and community groups.

The bulk of the compensation fund would come from the BSA’s two largest insurers, Century Indemnity and The Hartford, which reached settlements calling for them to contribute $800 million and $787 million, respectively. Other insurers agreed to contribute about $69 million.

Insurers opposing the plan contend that the BSA is contractually obligated to assist them in investigating, defending and settling claims, as it did before the bankruptcy. They say that the BSA, desperate to escape bankruptcy, colluded with claimants’ lawyers to inflate both the volume and value of claims in order to pressure insurers for large settlements, then transferred its insurance rights to the settlement trust. The insurers argue that if the BSA transfers its rights under insurance policies to the settlement trustee, it must also transfer its obligations under those policies.

Attorneys for the Boy Scouts and plan supporters say the BSA’s obligations under the insurance policies are in fact being transferred to the trustee — subject to both the bankruptcy plan and “applicable law.” Non-settling insurers contend that such language creates too much uncertainty regarding their rights and how much discretion is being given to the retired bankruptcy judge who would oversee the settlement trust.

Another key legal issue in the case is whether third parties that are not bankruptcy debtors themselves can escape future liability in the tort system by contributing to a Chapter 11 debtor’s reorganization plan.

Such third-party releases, spawned by asbestos and product-liability cases, have been criticized as an unconstitutional form of “bankruptcy grifting,” where non-debtor entities obtain benefits by joining with a debtor to resolve mass-tort litigation in bankruptcy. Federal courts in some jurisdictions, including Delaware, have allowed third-party releases in certain circumstances, while courts in other jurisdictions have rejected them.

Under the BSA plan, insurance companies, local Boy Scouts councils and troop sponsoring organizations would receive broad liability releases protecting them from future sex abuse lawsuits in exchange for contributing to the victims’ compensation fund – or even for just not objecting to the plan.

Some abuse survivors argued that releasing their claims against non-debtor third parties without their consent would violate their due process rights. The U.S. bankruptcy trustee, the government’s “watchdog” in Chapter 11 bankruptcies, argued that such releases are not allowed under the bankruptcy code, and that the scope of the proposed releases in the BSA plan, potentially extending to tens of thousands of entities, was unprecedented.

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