Statutory Mootness Under § 363(m) and the Limits on Nonconsensual Third-Party Releases in Chapter 11 Plans

Introduction

In In re Boy Scouts of America & Delaware BSA LLC (3d Cir. May 13, 2025), the Third Circuit confronted a sprawling Chapter 11 reorganization arising out of decades-long sexual abuse claims against the Boy Scouts of America (BSA) and related entities. After negotiating a global settlement that included sale-back of longstanding liability insurance policies (the “Insurance Policy Buyback”), the Bankruptcy Court confirmed a plan (the “Plan”) establishing a $2.48 billion Settlement Trust to resolve tens of thousands of abuse claims. On appeal, certain abuse claimants (the Lujan and Dumas & Vaughn Claimants) sought to void key nonconsensual releases of claims against nondebtor insurers and chartered entities, while two groups of insurers (the Certain Insurers and the Allianz Insurers) pressed narrower objections about preserving their coverage rights. The Third Circuit’s decision clarifies the interplay between Bankruptcy Code § 363(m) (statutory mootness), equitable mootness, and the Supreme Court’s recent guidance on nonconsensual third-party releases in Harrington v. Purdue Pharma L.P. (2024).

Summary of the Judgment

The Third Circuit panel issued a divided decision:

Lujan and Dumas & Vaughn Claimants: Their appeals were dismissed as statutorily moot under § 363(m) because the sale of the insurance policies had been authorized, consummated without a stay, and the relief they sought (voiding nonconsensual third-party releases) would “affect the validity of the sale.”
Certain Insurers: Their request for three targeted Plan modifications (to ensure preservation of policy rights and defenses) did not implicate the validity of the buyback sale and thus avoided § 363(m). On the merits, the Plan as confirmed already preserved their contractual rights and defenses, so their appeal was denied.
Allianz Insurers: Similarly unaffected by § 363(m), they challenged the Plan’s “judgment reduction” mechanism that swept away their contribution and indemnity recovery in certain coverage disputes. The panel held that under Purdue, nonconsensual releases cannot discharge a nondebtor’s full rights, and the Allianz Insurers must retain the right to recover defense and indemnity costs. The Court reversed that portion of the Confirmation Order and remanded.

The overall result: appeals by claimants restoring nonconsensual releases were barred; the Certain Insurers’ appeal failed on the merits; the Allianz Insurers prevailed on a narrow coverage point.

Analysis

1. § 363(m) Statutory Mootness

Text and purpose. Section 363(b) authorizes a debtor to “use, sell, or lease” estate property out of the ordinary course of business. Subsection (m) provides that if a sale is authorized under § 363(b) or (c), and the purchaser acted in good faith and closed without a stay, then “the reversal or modification on appeal” of that authorization “does not affect the validity of the sale.” Congress enacted § 363(m) to foster finality in postpetition sales and to prevent erosion of estate value by protracted appeals.

Application to the Insurance Policy Buyback.

Authorized under § 363(b): The Confirmation Order expressly approved assignment-and-buyback agreements with the Settling Insurers under § 363(b).
Good-faith purchasers: The Bankruptcy Court found, and the Third Circuit agreed, that the Settling Insurers paid full value and entered the transactions without collusion.
No stay: The transactions closed on the Plan’s Effective Date without any appeal stay.
Effect on sale validity: Voiding the releases would undermine the quid pro quo under which insurers paid approximately $1.6 billion to reacquire their policies.

Because all statutory conditions were met, § 363(m) barred review of appeals that would “materially increase or decrease the purchase price”—namely, the Lujan and Dumas & Vaughn Claimants’ challenges to the nonconsensual releases.

2. Equitable Mootness

As an alternative basis, bankruptcy appellate courts may invoke equitable mootness to dismiss appeals where a plan has been substantially consummated and relief would “fatally scramble the plan” or injure innocent third parties. The Court emphasized:

Substantial consummation: Here, the Settlement Trust was funded with billions in cash, escrow, real estate sales, notes and insurance rights; BSA resumed operations; and distributions to abuse claimants have begun.
Reliance and disruption: Striking the releases now would collapse the global settlement embodied in the Plan, disrupting payments to thousands of claimants and the BSA’s reorganization.

The Court nonetheless declined to rest on equitable mootness alone, given the clarity of § 363(m), but noted it would apply it narrowly if needed.

3. Nonconsensual Third-Party Releases After Harrington v. Purdue Pharma

In Harrington v. Purdue Pharma (2024), the Supreme Court held that § 1123(b)(6) does not authorize nonconsensual releases of third-party claims in a plan. The Third Circuit reaffirmed that principle, but concluded it could not unwind the releases in BSA’s Plan because § 363(m) prohibited review. The decision highlights the tension between Purdue’s substantive rule and § 363(m)’s procedural bar.

4. Coverage Defense and “Judgment Reduction” Clause

The Allianz Insurers pressed that the Plan’s reduction-of-judgment mechanism deprived them of indemnity and contribution rights they would have had outside bankruptcy. The Court agreed under Purdue that nonconsensual releases cannot extinguish a nondebtor’s right to total recovery. On remand, the Confirmation Order’s judgment-reduction paragraph must be rewritten to ensure Allianz retains full coverage for excess defense and indemnity claims.

Impact

This decision has far-reaching implications for Chapter 11 practitioners and litigants:

It underscores § 363(m) as a powerful bar to appeals of unstayed postpetition sales, even when those sales are embedded in a plan and accompanied by controversial releases.
It confirms that nonconsensual third-party releases are substantively impermissible under Purdue, but may survive appellate scrutiny if § 363(m) applies.
It clarifies that narrowly tailored coverage objections—unrelated to sale consideration—can avoid statutory mootness and be heard on the merits.
It warns debtors and insurers to craft plan releases and related agreements carefully, anticipating both § 363(m) defenses and evolving Supreme Court precedent.

Complex Concepts Simplified

§ 363(m) “Statutory Mootness”: A rule that forbids undoing a Chapter 11 sale on appeal if: (1) the sale was authorized under § 363(b)/(c), (2) the buyer acted in good faith, (3) no stay was obtained, and (4) the requested relief would affect the sale’s validity.
Nonconsensual Third-Party Release: A provision in a reorganization plan that purports to discharge claims against entities other than the debtor—held impermissible by the Supreme Court in Purdue unless the affected parties consent.
Equitable Mootness: A judge-made doctrine allowing courts to dismiss appeals of confirmed plans that are substantially consummated when relief would “knock the props out” and harm third parties who relied on the plan.
Good Faith Purchaser: An entity that pays fair value for estate assets, without collusion or fraud, and whose purchase cannot later be clawed back on appeal under § 363(m).

Conclusion

In re Boy Scouts of America & Delaware BSA LLC illustrates the high stakes and complex interplay between asset sales, plan confirmation, and third-party releases in large Chapter 11 cases. The Third Circuit’s ruling affirms that § 363(m) can shield key sales and releases from appellate reversal, even in the wake of the Supreme Court’s prohibition on nonconsensual third-party releases. At the same time, it carves out space for insurers to preserve essential coverage rights when their objections are truly collateral to the sale. Practitioners should take heed: the procedural architecture of a deal—choice of statutory provisions, timing of authorization, and stay strategy—can prove just as decisive as the substantive terms when it comes to appellate review in bankruptcy.