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Boy Scouts’ Plan Changes Likely to Pave Path Out of Bankruptcy

Aug. 17, 2022, 9:00 AM

The Boy Scouts of America’s reorganization plan creating a sex abuse victims fund of more than $2 billion is back on track for likely court approval following revisions to a controversial piece of the deal involving the Mormon church.

The youth organization modified the plan on Aug. 12 to change how the Church of Jesus Christ of Latter-Day Saints, which sponsored scouting activities and was named as a defendant in some abuse lawsuits, will be treated. In doing so, the Boy Scouts won’t get the church’s previously proposed contribution of $250 million to the settlement fund.

The plan amendment came after Judge Laurie S. Silverstein of the US Bankruptcy Court for the District of Delaware in July approved most of the plan but ruled that the legal protections to be given the Mormon church in exchange for a $250 million contribution went too far. Under the amended plan, which aims to resolve decades worth of scouting-related sex abuse claims, the church will receive more limited protections.

Though some questions about the plan still remain, the change to the Mormon church provision appears to be an effort to mollify the judge.

The court expected “the debtors and plan proponents and others to come back with a [plan] confirmation order which excludes problems,” said Ted Gavin, managing director of Gavin/Solmonese LLC, a turnaround and restructuring firm.

Controversial Releases

The Mormon church has a long history with the Boy Scouts, in 1913 becoming the first official charter of the organization, according to the church’s website.

“The Mormon church was Boy Scouts’ dominant sponsoring organization, until it began allowing gay members,” Gavin said.

The bankruptcy plan provides liability releases to a number of non-bankrupt entities also facing exposure for alleged sexual abuse, including local scouting councils and sponsoring organizations, such as schools or churches. The extent of those liabilities shifts depending on whether the “chartered organization” contributes to the victims fund under a settlement with the Boy Scouts and a committee of tort claimants representing the abuse victims.

The plan initially provided that the Mormon church would receive releases for all sexual abuse claims—not just those that arose in the context of Boy Scouts activities. Under the revised plan, the church will only be released from scouting-related abuse claims that accrued after 1976, in exchange for giving the Boy Scouts any rights to insurance payments and waiving any indirect claims against the organization.

The plan offers differing results for victims, depending on the extent of their damages and their ability to prove them.

“For some victims it’s a great result,” Gavin said. “For others, maybe they could do better if they litigated their claims separately, but this is what bankruptcy does—it channels the claims into the same funnel, good and bad, varying degrees of injury, different kinds of proof.”

No Plan ‘Blow Up’

When Silverstein declined to approve the plan in its entirety, “the case didn’t blow up; there’s still going to be a plan,” said Clifford White III, who recently retired after serving 17 years as the director of the Executive Office of the US Trustee, the Justice Department’s bankruptcy watchdog branch.

“It rarely happens that a plan will just become undone when a judge says ‘no,’” White said. “The parties will find a way to make it work.”

A similar situation arose in the Purdue Pharma L.P. bankruptcy, Gavin noted. When a New York bankruptcy court wouldn’t initially approve releases for members of the Sackler family who owned and controlled the opioid manufacturer, the Sacklers subsequently found a couple billion dollars more to contribute for the existing settlement—enough for creditors and the bankruptcy judge to approve the deal.

Additionally, in the Purdue case, the judge “scaled back the releases that the Sacklers were to get, which made it clear that events that weren’t tied to the debtor’s business weren’t going to be released,” said attorney Catherine Steege of Jenner & Block LLP. Steege represented USA Gymnastics, which went through Chapter 11 to create the means to handle hundreds of sexual abuse claims.

But Silverstein is breaking from Purdue by emphasizing in her opinion that “this is not a case in which the perpetrators are released,” White said.

What’s Next

In some bankruptcy cases, a judge will require the debtor to distribute new disclosures and conduct a whole new vote of creditors following plan modifications. It remains to be seen whether any party—or the judge—will seek to take that step.

It’s a question of whether the modification is “material,” Steege said. She thinks it’s unlikely that the court will require new disclosures and voting.

“The judge wrote the opinion so that they could say it’s not a material modification,” Steege said of the change to the Mormon church’s treatment.

It’s also unclear whether anyone will appeal should the court approve the modified plan. Although the plan was previously approved by a majority of claim-holders, some voted against the plan and objected to confirmation.

A number of insurance companies that didn’t settle with the Boy Scouts and the tort committee may appeal. Those insurers opposed the authority the plan gave the victims trust to determine the value of individual tort claims.

“I think insurers will appeal, at least for leverage,” Steege said.

In the USA Gymnastics case, some dissenting insurance companies appealed the plan approval, she said. The settling insurers then refused to make required plan payments for fear of facing exposure to demands for contributions from non-settling insurance companies.

Ultimately, USA Gymnastics got a stipulation that allowed the settling insurers to make the payments called for in the plan, she said.

The Boy Scouts’ non-settling insurers might still be looking for a better deal, Steege said.

The case is In re Boy Scouts of America, Bankr. D. Del., No. 20-10343, 8/16/22.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com, Melissa B. Robinson at mrobinson@bloomberglaw.com