Finality of § 363(b) Sales and the Limits on Non-Consensual Third-Party Releases in Chapter 11 Plans

Introduction

This commentary examines the Third Circuit’s May 13, 2025 decision in In re Boy Scouts of America and Delaware BSA, LLC, which addresses two core issues in large‐scale Chapter 11 reorganizations: (1) the extent to which non-debtor parties can challenge non-consensual third-party releases embedded in a confirmed plan, and (2) the scope of 11 U.S.C. § 363(m) in insulating a § 363(b) sale from appellate reversal. In the underlying Chapter 11 case, the Boy Scouts of America (BSA) and its non-debtor affiliates proposed a global settlement of thousands of sexual-abuse claims by creating a trust funded with nearly $2.5 billion in cash and insurance rights. That funding hinged on § 363(b) “buyback” sales of decades-old liability policies back to BSA’s insurers in exchange for non-consensual releases of all abuse-related claims against them. On appeal from confirmation, the Third Circuit (majority) held that § 363(m) bars any reversal of the policy sales and thus precludes invalidating the releases. However, a limited class of non-debtor insurers (the Certain Insurers and the Allianz Insurers) obtained narrow relief because their challenges did not directly upset the § 363(b) sales.

Case Background

BSA and Abuse Claims: Founded in 1916, BSA oversaw youth scouting through national headquarters, 250 autonomous Local Councils and thousands of Chartered Organizations. Beginning in the 1930s and intensifying after the 1970s, BSA obtained liability insurance to cover sexual-abuse claims arising in its programs. In the 2010s, dozens of states revived long-barred claims, and BSA faced tens of thousands of lawsuits alleging decades-old abuse.
Chapter 11 Filing: In February 2020 BSA and Delaware BSA, LLC filed for Chapter 11 in the District of Delaware. Over 82,000 unique abuse claims were asserted, with an estimated aggregate value of $2.4–3.6 billion.
Global Settlement Plan: After extended mediation, the Debtors structured a plan funding a trust (“Settlement Trust”) with non-debtor contributions and proceeds of insurance policy buybacks—cash payments and escrow totaling $1.6 billion from insurers plus $880 million in non-debtor funding. The Plan included four options for claimants to liquidate claims: an expedited $3,500 payment; an individualized “Claims Matrix” valuation; an alternative tort‐system election; or an independent judicial evaluation.
Non-Consensual Releases: As consideration for the insurers’ buyback payments, the Plan released all abuse claims (and any rights of contribution or indemnity) against the insurers and all insured entities (Local Councils, Chartered Organizations). Numerous direct abuse claimants (the Lujan and Dumas & Vaughn groups) objected to these “third-party releases.”
Plan Confirmation and Appeals: The Bankruptcy Court confirmed the Plan in September 2022. On April 19 2023 the Plan became effective after the District Court (Andrews, J.) affirmed confirmation. Four sets of appellants appealed, including the Lujan and D&V abuse claimants seeking wholesale vacatur, and various non-settling insurers seeking either preservation of contractual rights or broader relief.

Summary of the Third Circuit Decision

The Third Circuit majority reached four principal conclusions:

Bankruptcy Jurisdiction: The Bankruptcy Court validly exercised “related-to” jurisdiction over claims against non-debtors (Local Councils and Chartered Organizations) on account of shared insurance coverage and indemnity obligations that could impact BSA’s estate.
Statutory Mootness (§ 363(m)): The sales of the liability policies under § 363(b) were confirmed by plan incorporation and were not stayed pending appeal. Those sales were made to good-faith purchasers for value. Under § 363(m), “the reversal or modification … of an authorization of a sale” does not affect the validity of the sale to a good-faith purchaser unless the sale was stayed. Because vacating the releases would necessarily unwind the § 363(b) buybacks, the appeals by the Lujan and D&V Claimants are statutorily barred and must be dismissed.
Equitable Mootness: The Certain Insurers’ and Allianz Insurers’ narrower appeals do not affect the validity of the § 363(b) sales. Thus, § 363(m) does not bar them. Equitable mootness likewise does not apply because their requested relief is limited, collateral to the sales, and will not “knock the props out from under” the Plan or harm reliance interests.
Merits for Non-Settling Insurers:
- The Certain Insurers failed to identify any actual impairment of their policy rights. The Plan and Confirmation Order fully preserve their contractual defenses and rights, so no textual amendments are required.
- The Allianz Insurers successfully showed that the Plan’s “judgment reduction” clause (which offsets a non-settling insurer’s liability by any contribution claim against a settling insurer) would strip them of any recovery for “excess” defense costs if they prevailed on coverage defenses after paying defense fees. Under Harrington v. Purdue Pharma, non-consensual releases of non-debtor claims cannot discharge the rights of objecting parties without their consent. The court thus reversed as to the Allianz Insurers and directed the Bankruptcy Court to amend the clause so they can recover full excess costs from the Settlement Trust.

Analysis

Precedents Cited

11 U.S.C. § 363(m): “The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section … does not affect the validity of a sale … to an entity that purchased … such property in good faith … unless … stayed pending appeal.”
Pittsburgh Food & Beverage v. Ranallo (3d Cir. 1997): § 363(m) bars appeal of a § 363(b) sale if not stayed.
Krebs Chrysler-Plymouth v. Valley Motors (3d Cir. 1998): § 363(m) furthers finality and bidding incentives; relief that “materially increase[s] or decrease[s] the purchase price” is barred.
Cinicola v. Scharffenberger (3d Cir. 2001): A second-in-time order confirming a prior § 363 sale falls under § 363(m) if “inextricably intertwined.”
Harrington v. Purdue Pharma (2024): § 1123(b)(6) does not authorize non-consensual releases of non-debtor claims; limits on third-party releases found only in specific Code provisions (e.g., § 524(g) in mass-tort cases).
In re Continental Airlines (3d Cir. en banc 1996): Equitable mootness doctrine authorizes discretionary dismissal of a bankruptcy appeal when “granting relief would fatally scramble the plan” or “significantly harm third parties” after “substantial consummation.”

Legal Reasoning

The court’s key legal holdings rest on two separate statutory sub-regimes:

Statutory Mootness under § 363(m): By its plain terms, § 363(m) protects unstayed sales under § 363(b) or (c) to good-faith purchasers—even if an appeal of the authorization succeeds—unless the sale itself was stayed. The Plan’s incorporation of the policy buybacks and the Bankruptcy Court’s express finding of good faith brought the sales squarely within § 363(m). Because reversing the non-consensual releases would unwind the insurer sales, the appeals by the direct abuse claimants are barred. The court endorsed this result even though the sales were effectuated in a confirmation order rather than a stand-alone § 363 sale order.
Limits on Third-Party Releases: The Supreme Court in Purdue held that § 1123(b)(6) cannot support non-consensual releases of non-debtor claims. Third-party releases must either be consensual or arise under an exception like § 524(g). While the Lujan and D&V Claimants cannot pursue that argument (statutorily moot), the Allianz Insurers could secure relief because their narrower claim for excess defense costs did not implicate the § 363(b) sales directly. The court thus enforced Purdue to amend the Plan’s “judgment reduction” and restore the Allianz Insurers’ full recovery rights.

Impact on Bankruptcy and Insurance Coverage Litigation

The Third Circuit’s decision has three principal effects:

Finality of § 363 Sales: Plans that incorporate § 363(b) sales of estate assets benefit fully from § 363(m)’s bar on appellate reversal unless those sales were stayed. This reinforces deference to trustee/debtor business judgments in run-off sales and motivates purchasers to bid boldly for estate assets.
Boundaries of Non-Consensual Releases: Even if releases are embedded via plan-incorporated § 363(b) sales, Purdue remains sound law for objecting parties whose challenges are not statutorily moot. Third-party releases of non-debtor claims still require consent (or a specific Code exception), at least for discrete issues like contribution or indemnity rights.
Future Plan Design and Litigation Strategy: Debtors and insurers will structure deals carefully to maximize § 363(m) protections—e.g., by using plan confirmation to “authoriz[e]” sales—but remain mindful that Purdue can force carve-outs for objecting non-debtors on narrowly tailored issues. Appellants must tailor relief requests to avoid running afoul of § 363(m)’s bar or produce workable alternatives that leave sales intact.

Complex Concepts Simplified

Section 363(b) Sales: Allows a debtor in Chapter 11 to sell estate property “free and clear” of liens and claims, subject to bankruptcy court approval after a business‐judgment review.
Statutory Mootness (11 U.S.C. § 363(m)): Even if an appeal succeeds in invalidating a sale authorization under § 363(b), the sale itself stands—provided (i) the sale was authorized under § 363(b)/(c), (ii) the purchaser acted in good faith, and (iii) the sale was not stayed pending appeal. The policy is to ensure finality of sales in a volatile bankruptcy environment.
Non-Consensual Third-Party Releases: Plan provisions that unwind claims against non-debtor third parties (e.g., insurers, affiliates). Permissible only if claimants consent or under specific statutory carve-outs like § 524(g) in mass tort cases. In Purdue, the Supreme Court held § 1123(b)(6) does not authorize such releases.
Equitable Mootness: A discretionary judge-made doctrine allowing courts to dismiss bankruptcy appeals after a plan is “substantially consummated” if granting relief would fatally upset the plan or harm third-party reliance interests. This ensures stability once a complex reorganization has taken effect.

Conclusion

The Third Circuit’s ruling in Boy Scouts of America underscores two enduring principles in modern reorganizations: First, § 363(m) shields confirmed § 363(b) sales from appellate reversal, thereby encouraging robust bidding for estate assets in Chapter 11. Second, Harrington v. Purdue Pharma remains a critical limit on non-consensual third-party releases—objecting non-debtors can preserve their rights on discrete issues (like contribution or defense cost recoupment) even within a § 363-funded plan. For large-scale, insurance-heavy bankruptcy cases, this decision draws a sharp line between sales finality and the enforceable boundaries of third-party releases, offering a blueprint for future Chapter 11 settlements and appellate strategies.