Statutory Finality of § 363(b) Sales and Insulation of Non-Consensual Third-Party Releases in Chapter 11 Plans

Introduction

These consolidated appeals arise from the Boy Scouts of America’s (BSA) Chapter 11 plan, which resolves thousands of historical sexual-abuse claims by creating a trust funded largely by the sale of BSA’s liability insurance policies and contributions from third parties. After extensive confirmation proceedings, the Bankruptcy Court approved a plan containing “non-consensual third-party releases” that bar claimants from pursuing certain defendants unless they affirmatively opted out. Two groups of abuse claimants (the Lujan and Dumas & Vaughn claimants) seek to unwind the entire plan, arguing that recent Supreme Court authority (Harrington v. Purdue Pharma, 603 U.S. 204 (2024)) forbids non-consensual releases. Two sets of insurers pursue narrower relief, preserving policy defenses or protecting excess‐defense claims. The Third Circuit held that (1) § 363(m) of the Bankruptcy Code statutorily bars reversal of the policy “buyback” sale embedded in the plan, so the Lujan and Dumas & Vaughn appeals must be dismissed; (2) equitable mootness does not bar the insurers’ appeals; (3) the plan already preserves most insurers’ rights; and (4) a carve-out is required to protect certain insurers’ excess-defense claims.

Summary of the Judgment

The Third Circuit affirmed the plan insofar as it (a) creates a $2.48 billion trust funded by contributions and insurance-policy buybacks, and (b) enjoins claimants from pursuing released parties absent opt-out.
It dismissed the appeals of the Lujan and Dumas & Vaughn claimants as “statutorily moot” under § 363(m), because reversing plan-embedded policy sales would “affect the validity” of those sales.
It rejected equitable mootness as to the insurers’ appeals, noting their requested relief (minor plan modifications) would not “fatally scramble” the confirmed plan.
It held the plan as written already preserves “non-settling” insurers’ contractual defenses and rights under their assigned policies.
It required amendment of the plan’s “judgment reduction” clause to ensure that “excess” defense claims against settling insurers remain fully compensable, consistent with the Supreme Court’s prohibition on non-consensual releases (Harrington v. Purdue).

Analysis

Precedents Cited

Pacor, Inc. v. Higgins (743 F.2d 984 (3d Cir. 1984)): Defined “related to” bankruptcy jurisdiction—claims that “could conceivably affect” the estate.
In re Combustion Engineering (391 F.3d 190 (3d Cir. 2004)): Insurance assignments and indemnity obligations can support related-to jurisdiction.
Harrington v. Purdue Pharma (603 U.S. 204 (2024)): Bankruptcy Code does not authorize non-consensual third-party releases under § 1123(b)(6).
In re Cinicola (248 F.3d 110 (3d Cir. 2001)): § 363(m) bars reversal of a sale authorization on appeal if made in good faith and not stayed.
In re Energy Future Holdings (949 F.3d 806 (3d Cir. 2020)): § 363(m) applies equally to sales authorized in separate orders and later “ratified” in a plan confirmation order.
Equitable Mootness Doctrine (In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc)): Appeals may be dismissed when a plan is substantially consummated and undoing it would “fatally scramble” the reorganization and harm third-party reliance.

Legal Reasoning

Jurisdiction: The Bankruptcy Court properly exercised “related to” jurisdiction over claims against non-debtors based on shared policy coverage and indemnity obligations.
Statutory Mootness (§ 363(m)):
- Section 363(m) prohibits appellate reversal or modification of a § 363(b) sale authorization if (1) the sale was authorized under § 363(b), (2) the purchaser acted in “good faith,” and (3) the order and sale were not stayed.
- The plan embedded a policy “buyback” sale under § 363(b); BSA’s insurers paid over $1.6 billion in return for their policies and mutual releases; the Bankruptcy Court found them “good faith” purchasers; no stay issued.
- Dismissing the Lujan and Dumas & Vaughn appeals preserves the § 363(b) sale, promoting the finality that § 363(m) guarantees.
Equitable Mootness:
- The plan is “substantially consummated” (assets transferred, BSA resumed operations, trust distributions began).
- None of the insurers’ requested relief would “fatally scramble” the plan or unjustly injure innocent third parties; changes are minor and collateral to the core sale.
Insurers’ Rights under the Plan:
- Certain Insurers argued the plan impaired their policy rights and defenses. The court held the plan and confirmation order expressly preserve those rights “to the extent otherwise available under applicable law.”
- Allianz Insurers demonstrated that the plan’s “judgment reduction” clause would extinguish excess-defense claims without their consent. Under Harrington v. Purdue, that result is impermissible. The court therefore reversed in part, ordering a carve-out so excess claims remain fully compensable.

Impact

This decision cements § 363(m) as a powerful protection for purchasers of estate assets, even when--as here--the § 363 sale is effectuated within a confirmed plan. It underscores the narrow window for challenging plan-embedded asset sales: absent a stay, appeals that threaten to undo a § 363 authorization must be dismissed. It also clarifies the interplay between Harrington v. Purdue’s prohibition on non-consensual releases and § 363(m): while a plan cannot constitutionally discharge third-party claims without consent, once a sale authorization is final and unstayed, challenges to that sale—and the releases that formed its consideration—must yield to statutory finality. Finally, it illustrates both the limits of § 363(m) (minor, collateral relief is still reviewable) and the judiciary’s commitment to ensuring full compensation for non-consenting insurers’ excess claims.

Complex Concepts Simplified

“Related-to” Jurisdiction: Bankruptcy courts can resolve claims that “could conceivably affect” the debtor’s estate, including indemnity obligations and shared insurance coverage.
Sale under § 363(b): A debtor may sell estate property outside ordinary course, subject to court approval. Purchasers fear appeals that would chill bidding, so § 363(m) insulates unstayed sales to good-faith buyers from reversal on appeal.
Statutory Mootness (§ 363(m)): If a sale was authorized under § 363(b), made in good faith, and not stayed, an appeal that would “affect the validity” of that sale is barred—even if the appeal raises constitutional issues or unfair releases.
Equitable Mootness: A judge-made doctrine dismissing appeals when plans are “substantially consummated” (assets moved, business resumed, distributions begun) and undoing them would wreck the reorganization and harm innocent third parties.
Non-Consensual Third-Party Releases: Plan provisions that discharge claims against non-debtor entities without each claimant’s consent. Harrington v. Purdue (2024) held these releases unconstitutional under the Code’s § 1123(b)(6), absent full satisfaction or claimant consent.
Judgment Reduction Clause: A mechanism allowing non-settling insurers to offset their liability to the trust by judgments against settling insurers. Without a carve-out, insurers would lose excess-defense claims—impermissible under Harrington.

Conclusion

The Third Circuit’s decision in the Boy Scouts appeals highlights two cardinal principles in contemporary bankruptcy practice:

Section 363(m) enforces the finality of bankruptcy asset sales, even when those sales are embedded within confirmed Chapter 11 plans. Unstayed sales to good-faith purchasers become immune from reversal or modification on appeal, upholding Congress’s goal of attracting bidders and preserving estate value.
Notwithstanding § 363(m), bankruptcy courts and parties must respect Hansen’s prohibition on non-consensual third-party releases. Where a release would fully discharge claims that cannot be revisited, or impair non-consenting insurers’ excess-defense rights, the plan must be amended or blocked to ensure full compensation.

By applying § 363(m) to dismiss the appeals of the Lujan and Dumas & Vaughn claimants and carving out a remedy for certain insurers, the court balances statutory finality against the Code’s substantive protections—reinforcing that plan confirmation and asset sales each carry their own, interlocking safeguards.