Bankruptcy Appeal Limits: §363(m) Statutory Mootness and Non-Consensual Third-Party Releases

Introduction

This commentary examines the Third Circuit’s May 13, 2025 decision in In re Boy Scouts of America and Delaware BSA LLC, which resolves consolidated appeals by (1) abuse survivors (the “Lujan Claimants” and “Dumas & Vaughn Claimants”) who challenged non-consensual releases in the confirmed chapter 11 plan; and (2) various insurers (the “Certain Insurers” and “Allianz Insurers”) who disputed how the plan treats their policy rights. The Boy Scouts of America and related Local Councils filed for bankruptcy in 2020 amid thousands of sexual‐abuse claims. After lengthy mediation the Debtors proposed a plan that bundled assets, insurance buybacks and non‐debtor releases into a global settlement trust. Four groups of appellants now seek differing remedies, ranging from outright reversal of the plan to targeted clarifications of insurers’ rights under their policies.

Summary of the Judgment

The Third Circuit’s en banc panel held:

Lujan & Dumas & Vaughn Claimants: Their appeals are statutorily moot under 11 U.S.C. § 363(m), because they challenge non-consensual releases that formed critical consideration for a § 363(b) insurance‐policy sale which was effected on the plan’s Effective Date and was not stayed on appeal. Accordingly, the Court dismissed their appeals.
Certain Insurers: Their requested clarifications—insuring that the trust and plan preserve their pre-petition rights and defenses—are collateral to the insurance buyback and do not affect the validity of the sale. The Third Circuit reached the merits and rejected their claims, finding existing plan language sufficient.
Allianz Insurers: The plan’s “judgment reduction” clause purports to bar their excess‐defense‐cost claims without consent, in conflict with Harrington v. Purdue Pharma. The Court reversed that clause and remanded for entry of an order preserving their right to full recovery on excess claims.

Analysis

Precedents Cited

Harrington v. Purdue Pharma, L.P. (603 U.S. 204 (2024)) – Supreme Court held non-consensual third-party releases in chapter 11 plans exceed § 1123(b)(6) authority.
In re Cinicola (3d Cir. 2001) – § 363(m) bars reversal of unstayed § 363(b) sales to good-faith purchasers, even when later confirmed in a plan.
In re Energy Future Holdings (3d Cir. 2020) – § 363(m) precludes appeals that would “affect the validity of the sale,” regardless of whether the sale occurred in a stand-alone order or via plan confirmation.
In re Abbotts Dairies (3d Cir. 1986) – good-faith purchaser inquiry under § 363(m) protects purchasers without fraud or collusion.
In re Plant Insulation (Bankr. N.D. Cal. 2012) – addressed adequacy of judgment reductions for non-settling insurers under § 524(g).

Legal Reasoning

The Court’s reasoning unfolds in four parts:

Jurisdiction: The Bankruptcy Court properly exercised “related-to” jurisdiction over claims against non-debtors (Local Councils, Chartered Organizations, insurers) because (i) shared insurance policies and (ii) indemnity obligations create a conceivable effect on the estate.
Statutory Mootness (§ 363(m)):
- § 363(m) prohibits reversal or modification of an authorization of a sale under § 363(b)/(c) where (a) the purchaser is in good faith, (b) the sale is unstayed, and (c) reversal would affect the sale’s validity.
- The Insurance Policy Buyback was effectuated on the plan’s Effective Date; the Settling Insurers are good-faith purchasers; no stay was obtained. Reversing the plan’s non-consensual releases would undermine the consideration for that sale—hence § 363(m) bars relief.
Equitable Mootness: The Court declined to invoke equitable mootness for the insurers’ appeals, because the targeted relief they seek (preserving policy rights; restoring excess-cost recovery) will not “fatally scramble” the plan or harm third-party reliance. The Court emphasized that § 363(m) itself supplies a narrower, congressionally designed bar.
Merits of Insurers’ Claims:
- Certain Insurers: Plan and Confirmation Order already preserve their contractual defenses and rights—no need for additional “magic words.” Proposed amendments are superfluous.
- Allianz Insurers: Under Purdue and common-law “one-satisfaction” principles, non-consensual release of excess-defense claims is impermissible. The Court reversed the judgment-reduction clause and directed a plan amendment guaranteeing full recovery on excess claims.

Impact

This decision establishes three key principles:

§ 363(m) as a Gatekeeper: Challenges to non-debtor releases that underpin an unstayed § 363(b) sale are statutorily moot, even where the sale is confirmed in a chapter 11 plan.
Limits on Insurer Releases: Harrington v. Purdue Pharma applies to bar non-consensual discharge of insurer contribution and indemnity claims in a chapter 11 plan unless those claims are fully satisfied or the insurers consent.
Narrow Equitable Mootness: Appellate courts should invoke equitable mootness only sparingly—targeted relief that does not unravel the plan or prejudice innocent participants remains reviewable.

Complex Concepts Simplified

§ 363(b) Sale: A bankruptcy court can authorize a debtor to sell estate assets outside the ordinary course, subject to good-faith purchaser protection.
§ 363(m) Statutory Mootness: Once an unstayed § 363(b) sale to a good-faith purchaser is authorized and consummated, reversal on appeal cannot claw back that sale—even if later confirmed in a plan.
Non-Consensual Third-Party Releases: Plan provisions that bar non-debtor claims without the claimants’ consent exceed § 1123(b)(6) authority per Purdue Pharma.
Equitable Mootness: A judge-made doctrine allowing dismissal of plan appeals when unwinding the plan would “fatally scramble” it or harm innocent third parties.
One-Satisfaction Rule: A plaintiff (or insurer) may only obtain one full recovery on a given claim—judgment reductions cannot serve as a partial discharge of a non-debtor’s obligation.

Conclusion

The Third Circuit’s decision underscores the interplay between § 363(b)/(m) sales, chapter 11 plan confirmation and non-consensual releases. By enforcing § 363(m)’s statutory bar, the Court protected the integrity of the insurance‐policy buyback that financed the Boy Scouts’ global resolution. At the same time, the Court reaffirmed Purdue Pharma’s prohibition on discharging non-debtor insurer claims without consent, preserving insurers’ excess-defense rights. Going forward, bankruptcy practitioners must carefully distinguish truly collateral appeals from those that would impair § 363 sales, and plan drafters must ensure that non-consensual releases do not exceed the Bankruptcy Code’s limited grant of authority.