Bankruptcy §363(m) Reins in Challenges to Non-Consensual Third-Party Releases: Commentary on Boy Scouts of America Appeals

Introduction

The Boy Scouts of America and Delaware BSA, LLC filed Chapter 11 in 2020 to address thousands of legacy sexual‐abuse claims. After two years of mediation, a global plan (“the Plan”) was confirmed in September 2022. The Plan included an “Insurance Policy Buyback” under 11 U.S.C. §363(b), funded largely by Settling Insurers in exchange for non‐consensual releases of abuse claims against them (and other “Protected Parties”) and the creation of a Settlement Trust to compensate survivors. Four groups of appellants then contested various provisions:

Lujan Claimants and Dumas & Vaughn Claimants: Victims seeking reversal of the entire Plan because it released nondebtors without their consent, contrary to Harrington v. Purdue Pharma (603 U.S. 204 (2024)).
Certain Insurers: Non‐settling carriers asserting that their policy rights and defenses were subordinated and asking for clarifying revisions to the Plan.
Allianz Insurers: Non‐settling carriers challenging the “judgment reduction” clause that they say ousted their contribution and indemnity rights.

Summary of the Judgment

The Third Circuit panel unanimously held:

Lujan & D&V Claimants’ appeals were statutorily moot under 11 U.S.C. §363(m) because the Confirmation Order authorized the sale of the Settling Insurers’ policies, the Settling Insurers purchased in good faith, and the sales were not stayed. Any relief those claimants sought would reverse or modify a §363(b) authorization, which §363(m) forbids on appeal.
Certain Insurers’ claims were not moot but failed on the merits: the Plan and Confirmation Order already preserved their policy rights and defenses, so no textual tweaks were needed.
Allianz Insurers’ claims likewise were not moot and the “judgment reduction” mechanism impermissibly discharged their non‐settling‐insurer contribution/indemnity rights. The Court reversed this carve‐out and ordered remand to restore a backstop so that Allianz carriers can recover defense costs or excess liability judgments they incur.

Analysis

1. Precedents Cited

Harrington v. Purdue Pharma (603 U.S. 204 (2024)): Supreme Court held that §1123(b)(6) does not authorize non‐consensual releases of third‐party claims in a Chapter 11 plan.
11 U.S.C. §363(m): Statutory mootness provision shielding good-faith purchasers in §363(b) sales from reversal or modification on appeal unless the sale was stayed.
Pacor, Inc. v. Higgins (743 F.2d 984 (3d Cir. 1984)): Defines “related to” jurisdiction for bankruptcy courts.
Cinicola v. Scharffenberger (248 F.3d 110 (3d Cir. 2001)) and In re Energy Future Holdings (949 F.3d 806 (3d Cir. 2020)): Held that §363(m) can apply to sales first authorized and later ratified via plan confirmation.
In re Abbotts Dairies (788 F.2d 143 (3d Cir. 1986)): Good-faith purchaser standard under §363(m).
In re Braniff Airways (700 F.2d 935 (5th Cir. 1983)) & In re Lionel Corp. (722 F.2d 1063 (2d Cir. 1983)): Sub rosa doctrine—§363(b) cannot disguise a plan of reorganization.
In re One2One Communications (805 F.3d 428 (3d Cir. 2015)): Equitable mootness doctrine and test (“substantial consummation” + “scramble”/“injure” third parties).

2. Legal Reasoning

Jurisdiction: The Bankruptcy Court had “related to” jurisdiction over all claims, including those against nondebtors (Local Councils, Charters, Insurers), because shared insurance coverage and indemnity obligations meant third‐party claims could impact the estate’s assets.

Statutory Mootness under §363(m):

Appeal from an authorization of a sale under §363(b).
– The Confirmation Order authorized the sale (“Insurance Policy Buyback”).
Sale made in good faith.
– Bankruptcy Court found Settling Insurers paid full value and lacked any fraud or collusion.
Sale not stayed pending appeal.
– No stay was obtained.

If all three are met—and any effective relief would “affect the validity of the sale”—§363(m) bars reversal or modification. The Lujan and D&V Claimants sought to void or undermine the releases that funded the buyback, which “would materially . . . decrease the purchase price.” The Court “decline[d] to permit . . . an opt-out” or additional indemnity contributions because those remedies would change what the Settling Insurers contracted to pay.

Equitable Mootness: The Court did not need to invoke it to dismiss the Lujan and D&V appeals, but it reaffirmed the doctrine for the Certain and Allianz Insurers’ appeals. A confirmed plan is substantially consummated once:

All (or substantially all) property dealt with by the plan has been transferred to the Settlement Trust or escrow;
The debtor (BSA) resumed its mission or management under the reorganized structure;
Distributions have commenced (over $125 million has already gone out).

And relief is barred if it would “fatally scramble” (“knock the props out”) or “harm third parties” who relied on plan confirmation. Installing a late opt‐out or reversing the releases clearly would upend billions in funding and years of process.

Merits of Non‐Moot Appeals:

Certain Insurers: Argued that the Plan subordinated their defenses and rights under assigned policies. The Court held the Plan text and Confirmation Order already preserve all of their defenses “to the extent available under applicable law.” No rewriting of the text was needed.
Allianz Insurers: Challenged the “judgment reduction” clause that extinguished their contribution and indemnity rights when they prevailed in coverage litigation. Under common‐law “one satisfaction” and Purdue’s limitation on non‐consensual releases, they must be able to recoup defense or excess‐liability costs. The Third Circuit reversed and remanded with instructions to add a trust backstop so they are “fully compensated.”

3. Impact

This decision underscores the potency—and limits—of §363(m) statutory mootness. A plan provision integral to a §363(b) sale cannot be undone on appeal unless the sale was stayed or the purchaser lacked good faith.
It reaffirms that “equitable mootness” remains the safety valve in reorganization appeals, protecting massive, multi‐year Chapter 11 plans from collateral unwinding.
Practitioners must heed Purdue when drafting releases. Plans cannot silently purport to discharge third‐party claims against nondebtors without consent. Carve‐outs or backstops may be required to protect non‐settling insurers’ rights.
On a broader level, the decision encourages transparency in plan negotiations: any settlement, sale, or release must be driven by Chapter 11’s formal procedures, not side deals hidden within complex documents.

Complex Concepts Simplified

“§363(b) Sale”: A Chapter 11 option allowing a debtor to sell assets outside its ordinary course, subject to court approval, to avoid value decay (“melting ice cube”).
Statutory Mootness (§363(m)): If you appeal a §363 sale order, but the buyer paid in good faith and you did not obtain a stay, the sale stands—even if you win your appeal—unless your requested relief would leave the buyer with something other than what it bargained for.
Equitable Mootness: A judge-made doctrine that declines appeals of big, finalized plans when unwinding them would “scramble” the reorganization and hurt innocent third parties who relied on the confirmed plan.
Non-Consensual Third-Party Release: Language in a plan that extinguishes claims victims have against nondebtors (e.g., insurers, councils) without their consent. Purdue held that §1123(b)(6) does not authorize such a release as part of a plan.
“Judgment Reduction” Clause: A mechanism allowing a non-settling insurer to offset its liability to the Settlement Trust by the amount it successfully recovers from a Settling Insurer. Absent a backstop, it can leave them out of pocket on defense costs.

Conclusion

The Third Circuit’s ruling in the Boy Scouts appeals demonstrates the twin pillars that govern the finality of Chapter 11 plans: statutory mootness under §363(m) protects third-party purchasers of estate assets, and equitable mootness preserves wide-ranging plan settlements from collateral disorder. But the decision also affirms that plan drafters cannot escape Purdue’s ban on non-consensual third-party releases—insurers who do not accept a release must be fully compensated for claims that are enjoined. Going forward, debtors, creditors, and insurers must engage Chapter 11’s safeguards—and the broad authority of the courts—up front, not behind the façade of an intra-plan §363 sale.