Statutory Mootness Under §363(m): Limiting Challenges to Plan-Incorporated §363 Sales

Introduction

This appeal arises from the confirmation of the Chapter 11 Plan of Reorganization for Boy Scouts of America and Delaware BSA, LLC (collectively “BSA”). In response to thousands of abuse claims, BSA negotiated a global settlement embodied in a plan that included:

the creation of a Settlement Trust to compensate abuse victims;
the “Insurance Policy Buyback,” a sale of certain liability insurance policies back to pre-petition carriers under 11 U.S.C. § 363(b);
“nonconsensual third-party releases” of claims against insurers and affiliated entities; and
a matrix and alternative claims procedures to quantify and pay abuse claims.

Four groups of appellants challenged various aspects of the confirmed Plan and the Bankruptcy Court’s confirmation order. Two groups of abuse claimants (the Lujan and the Dumas & Vaughn Claimants) sought to vacate the Plan entirely, arguing that nonconsensual releases violate the Bankruptcy Code as clarified in Harrington v. Purdue Pharma. Two groups of insurers (the “Certain Insurers” and the “Allianz Insurers”) pursued narrower relief—preserving policy defenses and protecting contribution claims.

Summary of the Judgment

The Third Circuit held that appeals by the Lujan and Dumas & Vaughn Claimants were statutorily moot under 11 U.S.C. § 363(m) because the confirmation order authorized a § 363(b) sale of insurance policies, was not stayed, and the purchasers paid full value in good faith. Consequently, the Court dismissed those appeals without reaching the merits.
The Court next considered equitable mootness for the insurers’ narrower appeals and concluded those appeals were not equitably moot.
On the merits:
- The “Certain Insurers” failed to demonstrate that the Plan impaired their policy rights, which were expressly preserved in the Plan and confirmation order. Their appeal was denied.
- The “Allianz Insurers” showed that the Plan’s “judgment reduction” provision impermissibly released their excess contribution and indemnity claims. The Third Circuit reversed on that point, directing amendment of the confirmation order to preserve those claims against the Settlement Trust.

Analysis

1. Statutory Mootness Under § 363(m)

Section 363(m) states:

“The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale . . . does not affect the validity of a sale . . . to an entity that purchased . . . such property in good faith . . . unless such authorization and such sale . . . were stayed pending appeal.”

The Court applied § 363(m) in three steps:

Identify the appeal as challenging a § 363(b) sale authorization in the confirmation order;
Confirm the purchaser(s) paid full value, in good faith, and the sale was not stayed;
Determine that vacating or modifying the authorization would undermine the sale’s validity—here, unwinding over $1.6 billion in insurance buybacks.

Because the Lujan and Dumas & Vaughn Claimants sought Plan reversal, thereby invalidating the insurance buybacks, § 363(m) barred relief. Accordingly, their appeals were dismissed.

2. Equitable Mootness

Even without § 363(m), our precedents permit a discretionary “equitable mootness” dismissal when:

The plan has been substantially consummated (transfers made, debtor resumed business or transferred its operations, distributions commenced); and
Granting relief would “fatally scramble the plan” or unduly prejudice third parties who relied on plan confirmation.

Here, the Plan was fully effective (assets transferred, distributions underway, BSA reorganized). Moreover, undoing the nonconsensual releases and insurance buybacks would upend the global deal reached among BSA, thousands of abuse claimants, and insurers. The Court thus confirmed that equitable mootness would have independently required dismissal of the claimants’ appeals.

3. Merits of the Insurers’ Appeals

a. Certain Insurers

The Certain Insurers sought Plan revisions to reaffirm their policy defenses and obligations. The Court held:

The Plan and confirmation order already “expressly preserve”—without limitation—each insurer’s contract rights and defenses “to the extent available under applicable law.”
Litigation positions taken by the Settlement Trustee do not rewrite the confirmatory language embedded in the Plan.
Because the Plan’s text suffices, no further amendments or “magic words” were needed, and the good-faith finding under § 1129(a)(3) stood.

Result: The Certain Insurers’ appeal was denied.

b. Allianz Insurers

The Allianz Insurers demonstrated that the Plan’s “judgment reduction” mechanism:

Enjoined their contribution/indemnity claims against Settling Insurers;
Allowed them only an offset against Trust judgments, which leaves no avenue to recover “excess” defense costs if no Trust judgment arises;
Effectively extinguished non-settling insurers’ excess coverage claims without their consent—contrary to Harrington v. Purdue Pharma’s prohibition on nonconsensual third-party releases.

The Court thus reversed that portion of the confirmation order and directed a revised “backstop” clause ensuring full recovery of excess claims from the Settlement Trust.

Precedents Cited

Harrington v. Purdue Pharma, L.P. (2024) – Nonconsensual third-party releases in a Chapter 11 plan are impermissible.
11 U.S.C. § 363(m) – Statutory mootness for unstayed § 363(b)/(c) sales to good-faith purchasers.
In re Energy Future Holdings (3d Cir. 2020) – § 363(m) bars appeals that affect the validity of a § 363 sale authorization.
In re Continental Airlines (3d Cir. en banc 1996) – Equitable mootness factors and discretionary dismissal of appeals after plan consummation.
In re Cinicola (3d Cir. 2001) – Successive orders “inextricably intertwined” with a § 363 sale invoke § 363(m).

Legal Reasoning

The Court resolved the appeal in four stages:

Jurisdiction: The Bankruptcy Court had “related-to” jurisdiction over third-party claims because the insurance policies and indemnification obligations were integral to the estate.
Statutory Mootness: § 363(m) prohibits reversal of unstayed § 363(b) sales that are integral to the Plan, so the appeals attacking those releases were dismissed.
Equitable Mootness: Even absent § 363(m), the Plan’s consummation and reliance interests barred disruption.
Merits:
- The Certain Insurers’ rights were already preserved by express Plan language.
- The Allianz Insurers were entitled to full recovery of excess coverage claims; the judgment-reduction clause was revised accordingly.

Impact

This decision establishes that when a Chapter 11 plan confirmation order authorizes a § 363(b) sale of estate assets—and the sale is not stayed and the purchaser paid value in good faith—§ 363(m) bars appellate reversal or modification of that sale. It underscores that nonconsensual third-party releases, if part of a § 363(b) transaction, cannot be unwound on appeal, even post-Purdue Pharma. At the same time, appellate courts will still entertain narrower, “collateral” challenges that do not upset sale validity and will enforce the Supreme Court’s prohibition on releasing coverage claims absent full compensation.

Complex Concepts Simplified

§ 363(b) Sale: A debtor can sell estate property outside ordinary business if the court authorizes it. Think of it as a special auction during bankruptcy.
§ 363(m) Statutory Mootness: If a buyer acquires estate assets in good faith under § 363(b), and the sale isn’t stayed, appellate courts cannot reverse that sale—even if the sale’s legal underpinning is later deemed incorrect—unless overturning it would not affect the sale’s validity.
Equitable Mootness: Even without § 363(m), an appeal after a plan is “substantially consummated” may be dismissed to avoid dismantling the reorganization and harming third parties who relied on it.
Nonconsensual Third-Party Releases: Provisions in a plan that bar lawsuits against non-debtor parties without each claimant’s consent. The Supreme Court in Purdue Pharma held these are not allowed under § 1123(b)(6).
Judgment Reduction: A mechanism where a policyholder’s coverage suit judgment can offset the trust’s claim, preventing double recovery—but, if mishandled, can leave insurers with no way to recoup excess defense costs.

Conclusion

The Third Circuit’s ruling clarifies two key points in Chapter 11 jurisprudence:

Statutory mootness under § 363(m) can bar appellate review of § 363(b) sales authorized within confirmed plans, provided purchasers acted in good faith and no stay was entered.
Nonconsensual third-party releases of coverage or indemnity claims cannot strip insurers of “excess” coverage rights; confirmation orders must preserve full recovery consistent with Purdue Pharma.

As a result, the Plan stands intact for abuse claimants, most challenges to the insurance buybacks are foreclosed, but insurers retain meaningful judicial avenues to protect their coverage interests.