Statutory and Equitable Mootness under Section 363(m): Insulating Chapter 11 Plan Sales from Appeal and the Limits on Third-Party Releases

Introduction

In In re Boy Scouts of America and Delaware BSA, LLC, the Third Circuit confronted the aftermath of one of the largest sexual-abuse claim mass tort bankruptcies in history. After years of litigation and mediation, Boy Scouts of America (“BSA”) and its affiliates proposed a global Chapter 11 plan (the “Plan”) that would (a) create a trust to compensate abuse survivors, (b) sell back or assign insurance policies to pre-petition insurers in exchange for contributions to that trust (the “Insurance Policy Buyback”), and (c) release those insurers and other non-debtor entities from further liability—including local councils, chartered organizations, and religious entities—without individual claimants’ consent. Over 82,000 affirmative abuse claims were filed against BSA, local councils and chartered organizations. A collection of claimants (the “Lujan Claimants” and “Dumas & Vaughn Claimants”) and two groups of non-settling insurers (“Certain Insurers” and “Allianz Insurers”) appealed the confirmation order.

The central issues were:

Whether the Plan’s non-consensual third-party releases could survive on appeal given the Supreme Court’s ruling in Harrington v. Purdue Pharma (which disallowed third-party releases without consent);
Whether the § 363(b) sale of insurance policies and accompanying releases were insulated from appellate review by § 363(m) (statutory mootness);
Whether equitable mootness barred challenges to plan provisions once the Plan was “substantially consummated”;
In the separate appeals by Certain Insurers and Allianz Insurers, whether the Plan preserved their contract rights and insured them against contribution and indemnity demands.

Summary of the Judgment

The Third Circuit issued a divided verdict. It held that:

Section 363(m) Bar: The appeals brought by the Lujan Claimants and the Dumas & Vaughn Claimants were statutorily moot. Because the Confirmation Order authorized the § 363(b) sale of insurance policies—“the Insurance Policy Buyback”—and those policies were transferred in reliance on that authorization, § 363(m) prohibits reversal or modification of that sale. Overturning the Plan’s releases would have “materially increase[d] or decrease[d] the purchase price” and thus “affect[ed] the validity of the sale.”
Equitable Mootness Not Reached: The Court did not need to invoke the judge-made doctrine of equitable mootness for those appeals once § 363(m) applied.
Insurer Appeals:
- Certain Insurers: Their request for narrowly tailored plan edits to ensure that their policy rights and defenses would be honored was deemed collateral to the Insurance Policy Buyback and not barred by § 363(m). On the merits, the Court agreed that the Plan and Confirmation Order already preserved their rights, so their appeal failed.
- Allianz Insurers: They likewise avoided § 363(m) but succeeded on the merits. The Plan’s “judgment-reduction clause” extinguished contribution/indemnity claims they would otherwise have against Settling Insurers, in conflict with Purdue and the common-law “one‐satisfaction rule.” The Third Circuit reversed that portion of the order and directed the bankruptcy court to add a backstop requiring the trust to pay any excess defense costs that cannot be offset by Settling Insurers.

Analysis

1. Precedents Cited

Purdue Pharma L.P.: The Supreme Court held that § 1123(b)(6) cannot authorize non-consensual third-party releases of non-debtor claims.
Krebs Chrysler-Plymouth: Interpreted § 363(m) to bar appeals that would “materially increase or decrease the purchase price” of § 363(b) sales.
Energy Future Holdings: Affirmed that § 363(m) protects sales authorized by confirmation orders if unstayed and in good faith, and examined what remedies remain “collateral” to the sale.
Pacor v. Higgins: Defined the “related to” jurisdiction test for bankruptcy courts: any proceeding that could conceivably affect the debtor’s estate.
Continental Airlines (en banc): First articulated equitable mootness as a limited, judge-made exception in the bankruptcy setting.
Semcrude, One2One Communications: Refined equitable mootness in our Circuit: two-prong test (substantial consummation plus risk of plan scramble or third-party harm).
Butner v. United States & Mission Products: Confirmed that bankruptcy law does not alter ordinary contract rights, including insurance policies.

2. Legal Reasoning

A. Jurisdiction: The Court upheld the bankruptcy court’s “related to” jurisdiction over non-debtor local councils and chartered organizations based on shared liability policies and indemnity obligations. Because the § 363(b) sale was integral to confirmation, the bankruptcy court did not need to submit findings under § 157(c).

B. Section 363(m) Statutory Mootness:

Text: “The reversal or modification on appeal of an authorization under subsection (b) or (c) . . . does not affect the validity of a sale . . . in good faith . . . unless . . . stayed pending appeal.”
Application: The Confirmation Order expressly authorized and consummated the Insurance Policy Buyback under § 363(b). The Settling Insurers were found to be good‐faith purchasers, the transaction was unstayed, and the releases were central to the sale consideration. Any relief to release non-consenting claimants would “materially increase” the purchase price and thus “affect” the sale’s validity.
Outcome: Appeal of the third-party releases by Lujan and D&V Claimants was dismissed as statutorily moot.

C. Equitable Mootness: Although the Court did not have to invoke it for the Lujan and D&V appeals, it confirmed that the Plan was “substantially consummated” (assets transferred, reorganized business resumed, distributions commenced) and found that partial plan scrambles and creditor reliance would result if releases were unwound. Equitable mootness remains a limited discretionary doctrine, used in “very few cases” to avoid “perverse” results.

D. Insurer Appeals on the Merits:

Certain Insurers: Claimed some plan edits were needed to preserve defenses; the Court held plan language already protected their rights under applicable law and contract. No good-faith failure by debtors was shown.
Allianz Insurers: Challenged the judgment-reduction mechanism that would extinguish excess defense cost recoupment. Under Purdue and the “one-satisfaction rule,” extinguishing non-settling insurers’ claims without full compensation is impermissible. The Court reversed that aspect and ordered a backstop requiring the trust to pay any unrecoverable excess liability.

3. Impact

Bankruptcy Practice: This ruling clarifies that:

§ 363(m) can bar appeals of plan provisions that form integral consideration of a § 363(b) sale, not just standalone sale orders.
Equitable mootness remains a fallback in extraordinary cases.
Non-consensual third-party releases remain impermissible under Purdue unless claimants are fully compensated, including indemnity/support obligations among insurers.

Plan Negotiations: Debtors and insurers will need to structure global resolutions carefully—keeping in mind that plan releases tied to § 363 sales may slip beyond appellate review, while also respecting Purdue’s full-satisfaction requirement. Insurer claim assignments and buybacks must fully preserve any contribution/indemnity rights or else face reversal.

Future Litigation: Appellate and bankruptcy courts will continue wrestling with:

When a plan‐embedded § 363 sale triggers § 363(m) protections.
The interplay between statutory mootness (§ 363(m)) and judge-made equitable mootness.
Defining “substantial consummation” and “scramble” in complex reorganizations.
Ensuring non-consenting third parties are fully compensated if released.

Complex Concepts Simplified

§ 363(b) Sale: A bankruptcy court can authorize a debtor to sell estate property outside the debtor’s ordinary course of business, typically to maximize value quickly.
§ 363(m) Statutory Mootness: If a § 363(b) sale is authorized, not stayed, and conducted in good faith, appeals that would undo or alter that sale are automatically barred.
Equitable Mootness: A judge-made doctrine declining appeals when a confirmed plan has been substantially implemented and undoing it would “scramble” the Plan and harm third-party reliance.
Non-Consensual Third-Party Releases: Plan provisions that discharge non-debtor liabilities (e.g., insurers, affiliates, volunteers) without each claimant’s consent. Purdue holds these are not permitted unless the released parties are fully “made whole.”
One-Satisfaction Rule: Contract and tort law principle preventing a claimant or insurer from securing two recoveries for the same loss—plans must provide full compensation when they discharge claims.

Conclusion

The Third Circuit’s decision in Boy Scouts of America strikes a careful balance:

It enforces § 363(m)’s preservation of sales to third-party insurers, even when embedded in a plan, to ensure finality and continued market willingness to transact with debtors.
It maintains the Supreme Court’s Purdue limitation on non-consensual third-party releases, requiring full compensation for any released claims.
It reaffirms equitable mootness as a narrow, discretionary doctrine to prevent chaotic unwinds of consummated plans.

For plan drafters and bankruptcy practitioners, the lesson is clear:

Embed § 363(b) sales deliberately, knowing that once consummated and unstayed, plan provisions integral to those sales may escape appellate reversal.
Never rely on third-party releases without ensuring claimants or counterparties are fully compensated—including indemnity and contribution rights—lest those specific provisions be reversed under Purdue.
Recognize that if your plan has already been substantially implemented, equitable mootness may foreclose challenges even on novel or arguably unlawful provisions.

Going forward, the case of Boy Scouts of America will guide how bankruptcy courts, debtors, and creditors navigate the tight interplay of sale finality, plan confirmation, and the rights of non-debtor claimants.