Statutory Appeal Limitations and Third-Party Releases in Chapter 11: §363(m) vs. Harrington

Introduction

In May 2025, a divided Third Circuit panel resolved a complex Chapter 11 dispute arising from the Boy Scouts of America’s 2020 bankruptcy filing. Decades of sexual‐abuse litigation had overwhelmed BSA, prompting a global plan that created a $2.5 billion abuse settlement trust funded largely by a §363(b) “policy buyback” from its pre-petition insurers. In exchange, the Settling Insurers and non-debtor Local Councils and Chartered Organizations received broad nonconsensual releases. Four sets of appellants then challenged confirmation: (1) the Lujan Claimants and (2) the Dumas & Vaughn Claimants, each group of abuse survivors seeking complete reversal; (3) various Certain Insurers (non-settling carriers) claiming the plan imperils their coverage rights; and (4) the Allianz Insurers, who seek to preserve “excess” defense‐cost claims released under the confirmation order. The Third Circuit addressed (a) jurisdiction over non-debtor claims, (b) statutory mootness under §363(m), (c) equitable mootness, and (d) the merits of the insurers’ objections in light of Harrington v. Purdue Pharma (2024).

Summary of the Judgment

The Third Circuit reached these key holdings:

Jurisdiction: The Bankruptcy Court properly exercised “related-to” jurisdiction over tort claims against Local Councils and Chartered Organizations based on shared insurance coverage and indemnity obligations.
Statutory Mootness (§363(m)): The appeals of the Lujan and Dumas & Vaughn Claimants were dismissed as statutorily moot because they sought reversal or modification of the §363(b) policy buyback without obtaining a stay and the Settling Insurers paid in good faith.
Equitable Mootness: The Certain Insurers’ and Allianz Insurers’ appeals survived statutory mootness, and no equitable‐mootness barrier existed because their requested relief is sufficiently collateral and would not “fatally scramble” the plan or unfairly prejudice innocent third parties.
Insurer Rights – Certain Insurers: The Court affirmed that the plan and confirmation order already preserve non-settling insurers’ rights and defenses under assigned policies; no further modifications were required.
Insurer Rights – Allianz Insurers: Pursuant to Harrington v. Purdue Pharma, the confirmation order’s “judgment-reduction” clause improperly discharged Allianz’s excess‐defense‐cost claims without consent. That provision was reversed, and a trust‐backstop amendment was directed.

Analysis

Precedents Cited

Harrington v. Purdue Pharma, 603 U.S. 204 (2024) – Supreme Court held Chapter 11 plans may not impose nonconsensual releases of non-debtor claims under §1123(b)(6).
Cinicola v. Scharffenberger, 248 F.3d 110 (3d Cir. 2001) – Established §363(m) bars appeals of unstayed §363(b) sale authorisations to good-faith purchasers when relief would affect the sale’s validity.
In re Energy Future Holdings Corp., 949 F.3d 806 (3d Cir. 2020) – Confirmed §363(m) applies to sales authorised and later cemented by confirmation orders.
In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996, en banc) – Origin of the Third Circuit’s equitable mootness.

Legal Reasoning

1. Jurisdiction. “Related-to” jurisdiction exists where tort claims against non-debtors “could conceivably” affect the BSA estate through shared policy limits and indemnity liabilities. The Bankruptcy Court’s subject-matter jurisdiction therefore properly included claims against Local Councils and Chartered Organizations.

2. Statutory Mootness (§363(m)). Section 363(m) provides that once the court authorises a §363(b) sale, “the reversal or modification on appeal” of that authorisation does not affect the sale’s validity if (a) the purchaser paid in good faith and (b) the sale was not stayed. The Lujan and D&V Claimants sought wholesale unwinding of the policy buyback and related releases—directly attacking a §363 authorisation—and had no stay in place; the Settling Insurers indisputably paid in good faith. Their appeals were therefore dismissed as statutorily moot.

3. Equitable Mootness. Although the Certain Insurers and Allianz Insurers were not barred by §363(m), the Court still considered whether equitable mootness should apply, i.e. whether granting their requested relief would (a) “fatally scramble” the plan or (b) unfairly harm innocent third parties who justifiably relied on the plan’s finality. Because their proposed amendments are limited and would not disrupt trust funding or impair other stakeholders, their appeals were allowed to proceed.

4. Insurer‐Rights on the Merits.
• Certain Insurers: The plan and confirmation order already preserve all pre-petition insurer rights and defenses. No textual fix was required.
• Allianz Insurers: The “judgment‐reduction” clause effectively discharged their excess coverage claims without consent—contrary to Harrington’s prohibition on nonconsensual third-party releases—a limitation not consensual, and thus impermissible. The clause was reversed and remanded for insertion of a trust‐backstop mechanism guaranteeing full recovery of excess defense costs.

Broader Impact

Reorganising debtors can still use §363(b) sales within Chapter 11 plans to fund settlement trusts, but must heed §363(m)’s bar on appeals: any challenge to a §363(b) authorisation must be stayed or risk forfeiture of appellate relief.
Following Harrington, nonconsensual third-party releases in confirmation orders remain impermissible; plan‐drafters must secure creditors’ or insurers’ explicit consent for releases or risk judicial invalidation.
Insurers and other non-debtor parties should insist on clear preservation clauses in plan documents and separate escrow or trust-backstop protections for contingent defense costs to avoid unintended release of coverage rights.

Complex Concepts Simplified

§363(b) Sale: A bankruptcy‐court authorisation for debtors in possession to sell estate property out of the ordinary course, subject to court approval.
§363(m) Statutory Mootness: If no stay is obtained, an unstayed §363(b) sale authorised in good faith cannot be reversed or modified on appeal; the sale’s validity is locked in to promote finality and bidding confidence.
Nonconsensual Third-Party Release: Plan language that releases claims against parties who did not vote or consent—now banned under Harrington unless those parties agree or are fully compensated.
Equitable Mootness: A narrow, judge-made doctrine allowing courts to dismiss appeals when plan implementation is so advanced that reversal would cause chaos or unfairly harm innocent third parties.

Conclusion

The Third Circuit’s ruling underscores the tightrope Bankruptcy practitioners must walk: statutory finality under §363(m) protects unstayed sales, while Harrington demands genuine consent or full satisfaction before non-debtors can be released. Plan negotiators and insurers must therefore structure §363(b) sales, release provisions, and preservation clauses with precision—securing stays if challenges are anticipated, obtaining explicit consent from non-debtors, and including trust-backstops for contingent liabilities—to ensure Chapter 11 reorganisations deliver closure rather than another round of litigation.