DOVER, Del. –
A Delaware bankruptcy judge approved parts of the Boy Scouts of America reorganization plan but rejected other provisions, saying in a ruling Friday that the organization had “decisions to make” about the plan.
Judge Laurie Selber Silverstein issued her 281-page decision several months after holding a trial to determine whether to uphold the plan. She invited the Boy Scouts to request a status conference in the case.
The Boy Scouts filed for bankruptcy protection more than two years ago to avoid a flood of lawsuits alleging child sexual abuse by Scout leaders and volunteers. It remains unclear when any of the 82,200 sexual abuse plaintiffs in the bankruptcy could receive compensation.
The plan asks the Irving, Texas-based BSA and its 250 local councils, along with insurance companies and chartered troop sponsoring organizations, to contribute some $2.6 billion in cash and in property to a fund for abuse claimants. In return, these entities would receive releases of liability protecting them from future lawsuits for Scouting-related abuses. The plan also allows abuse plaintiffs to sue insurance companies and local troop-sponsoring organizations that don’t reach their own settlements within a year.
When it filed for bankruptcy, the BSA faced about 275 lawsuits and was aware of about 1,400 other potential cases, but more than 82,200 abuse claims were filed in the bankruptcy. Lawyers for BSA insurers argued early on that the sheer volume of claims was an indication of fraud and the result of aggressive customer solicitation by lawyers and for-profit claims aggregators.
While some of those insurers later negotiated settlements for a fraction of the billions of dollars in liability they could face, other insurers continued to oppose the plan. They argued that the procedures for distributing compensation trust funds would violate their contractual rights to contest the claims, set a dangerous precedent for mass tort litigation, and result in grossly inflated payouts of abuse claims, including tens of thousands that would otherwise be banned by the passage of time.
The case presented Silverstein with one of the most contentious issues for bankruptcy judges – whether third parties who are not themselves debtors in the bankruptcy can escape future liability in the tort system by contributing to a Chapter 11 debtor’s reorganization plan. These third-party releases, spawned by asbestos and product liability cases, have been criticized as an unconstitutional form of “bankruptcy grifting”, where entities non-debtors gain benefits by joining with a debtor to resolve mass tort litigation in bankruptcy. Federal courts in some jurisdictions, including Delaware, have allowed third-party releases in certain circumstances, while courts in other jurisdictions have denied them.
Some victims of abuse have argued that releasing their claims against non-debtor third parties without their consent would violate their due process rights. The U.S. bankruptcy trustee, the government’s “watchdog” in Chapter 11 bankruptcies, argued that such releases are not permitted under the bankruptcy code and that the scope of the proposed releases in the BSA plan, potentially spanning tens of thousands of entities, was unprecedented.
In a key decision, Silverstein approved liability waivers for third-party nondebtors, noting that the BSA, local councils and troop-sponsoring organizations work together to deliver the Scouting program.
“Legal action against a local council or chartered organization could therefore have an immediate impact on BSA,” the judge wrote, noting that the releases are a “cornerstone” of the plan.
“As debtors and the (official abuse plaintiffs committee) stated over a year ago, without the possibility of third-party release, a BSA plan turns into a ‘death trap’ of litigation with minimal recoveries in sight,” Silverstein wrote. “…. Many survivors have waited thirty, forty or even fifty years to tell their story and experience meaningful recovery. This plan makes that possible.
The plan calls for the BSA itself to contribute less than 10% of the proposed settlement fund, which consists of property valued at approximately $80 million, an $80 million promissory note and approximately $20 million. dollars in cash.
Local BSA councils, which manage day-to-day troop operations, have offered to contribute at least $515 million in cash and property, as well as an interest-bearing note of at least $100 million. This contribution was conditional on certain protections for local troop-sponsoring organizations, called “chartered organizations.” These organizations, which number in the tens of thousands, include religious entities, civic associations and community groups.
The bulk of the compensation fund would come from the BSA’s two largest insurers, Century Indemnity and The Hartford, which have reached agreements calling on them to pay out $800 million and $787 million respectively. Other insurers have agreed to pay about $69 million. The BSA’s former biggest troop sponsor, The Church of Jesus Christ of Latter-day Saints, is reportedly paying $250 million for abuse claims involving the Mormon Church, while church-affiliated congregations United Methodist would pay $30 million.
In a decision that could significantly impact the case, Silverstein refused to approve the settlement involving the Mormon Church. The judge said she couldn’t approve the settlement because it includes liability releases for non-Scouting abuse claims and “extends third-party releases too far.”
The judge also declined to make several findings demanded by the Boy Scouts and a group of abuse plaintiffs called the Coalition of Abused Scouts for Justice as precedents required before a plan could be upheld. Among those findings were that the procedures for calculating the value of individual abuse claims were fair and appropriate, and that those values are based on and consistent with the BSA’s abuse settlements and historical litigation results. The plan’s proponents also insisted that the judge find that the plan and trust distribution proceedings were proposed “in good faith” and that the findings would be binding on the parties in any future legal proceedings.
Silverstein also ruled that a committee of abuse plaintiffs’ attorneys advising the trustee overseeing the victims’ compensation fund will have no right to consent or veto procedures crafted by the trustee, a federal judge in retirement, to unearth fraudulent claims.