Boy Scouts Settlement Pause Marks Shift on Bankruptcy Doctrine

A US Supreme Court order freezing the largest sex abuse settlement in US history signals a break from decades of tradition in how federal courts treat decided bankruptcy cases.

Justice Samuel Alito last week issued an administrative stay that indefinitely paused a $2.46 billion Chapter 11 plan settlement for the Boy Scouts that has already been operating for 10 months. The order throws a wrench in an already fraught process of compensating 82,000 child sex abuse claimants, while raising tough questions about what happens next.

The one-page order conflicts with how judges have traditionally applied what is known as the equitable mootness doctrine, a rule often used to block bankruptcy appeals for plans that are already being implemented. The judicially created doctrine—which Alito himself has questioned in the past—is rooted in the idea that undoing plan-related transactions and payments once they’re executed would be prohibitively difficult and unfair to the parties.

“Lawyers have been looking for the Supreme Court to do just that for a long time,” said bankruptcy attorney Matthew Gold of Kleinberg Kaplan Wolff & Cohen PC. “This could be that vehicle.”

A small group of survivors appealed the Boy Scouts bankruptcy plan, which went into effect in April 2023, over provisions that free from litigation the organization’s nationwide network of local councils and scouting activity sponsors. They say their grievance is directly tied to the high court’s pending decision on the legality of non-consensual third-party releases stemming from the bankruptcy case for opioid maker Purdue Pharma LP.

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The approved bankruptcy plans in both cases rely on controversial liability releases. But only the Boy Scouts plan has gone into effect. Whether the Supreme Court can unwind all or parts of a reorganization plan and settlement trust that’s been up and running is a matter of debate.

‘Too Much Power’

For several years, petitioners have been asking the Supreme Court to dismantle the application of equitable mootness, which is often cited by federal courts to deny appeals of corporate bankruptcy plans that have been approved and implemented.

Many courts in the past have invoked the doctrine to dismiss appeals from plan confirmation orders, but there are disparate appellate judge views on its application, said former Massachusetts bankruptcy judge Joan Feeney.

“The bankruptcy profession needs clarity on this,” she said.

Alito, who is assigned to receive and consider emergency requests coming out of the Third Circuit, decried the doctrine while serving on the circuit court. He wrote in a 2001 decision that it “places far too much power in the hands of bankruptcy judges.”

In their application for a stay of the Boy Scouts plan, the appealing survivors cited Alito’s dissent from a 1996 appellate court ruling in which he called equitable mootness a “curious doctrine” that allows courts “to refuse to entertain the merits of live bankruptcy appeals over which they indisputably possess statutory jurisdiction and in which they can plainly provide relief.”

Administrative Stay

Lawyers for 144 abuse survivors who have opposed liability releases for Boy Scouts of America affiliates are challenging the nonprofit’s bankruptcy plan at the US Court of Appeals for the Third Circuit. The group includes former scouts in the US and Guam.

Those survivors say the bankruptcy plan should wait for the Supreme Court’s decision in a related case that could free Purdue’s Sackler family owners from opioid-related litigation as part of a $6 billion settlement. The court, which appeared divided during arguments in early December, is expected to issue a decision in that case by June.

The abuse claimants challenging the Boy Scouts plan have said that all efforts to halt their appeal by invoking the doctrine are misguided and overstate the type of relief they’re seeking. Until there’s a ruling on third-party releases, the scouting settlement trust should be suspended, they said.

“The Supreme Court will be deciding the Purdue Pharma case soon and, unlike what the Boy Scouts are advocating, we just think survivors of scouting abuse should not be left behind,” Delia Lujan Wolff, an attorney representing the Guam-based survivors, said in an email. “The Bankruptcy Code applies to my clients, too.”

The Boy Scouts didn’t respond to a request for comment.

The Boy Scouts trust distributing settlement funds to survivors updated its website following Alito’s order, stating that all of its operations are temporarily suspended, “including the issuance of payments, the evaluation of claims questionnaires and the ability of trust staff to respond to questions from claimants or their counsel.”

Looking Ahead

Lawyers appeared divided on how to interpret Alito’s order from the perspective of how the Supreme Court may rule on Purdue.

Kleinberg Kaplan’s Gold, said it was significant that the high court is willing to halt the work of the Scouting Settlement Trust while it’s in the process of distributing funds to abuse survivors.

“This action is consistent with the idea that the court in Purdue will be invalidating releases,” he said.

But Georgetown University bankruptcy law professor Adam Levitin disagreed, saying it’s “too early to tell if Justice Alito’s order presages something about Purdue Pharma or is just an exercise in caution to allow the court an opportunity for further consideration before the plan goes into effect to effect.”

It’s “fascinating” that the court granted the emergency stay request in a case that “seems ripe for arguments about equitable mootness,” but it doesn’t necessarily indicate the likely outcome in the Purdue case, said Emory University bankruptcy law professor Lindsey Simon.

Alito’s terse order doesn’t indicate how long the administrative stay could last.

Still, it seems unlikely the court would intervene in the Boy Scouts case if it intends to uphold the non-consensual releases at issue in the Purdue case, Gold said.

Based on the posture of the cases, if third-party releases are invalidated in the Purdue appeal, “then it’s likely the Supreme Court will issue a mandate that the Boy Scouts case will have to go back to the bankruptcy court for the filing of an amended plan,” Feeney said.

The immediate effect of the stay has caused some consternation among former scouts who voted overwhelmingly in favor of the bankruptcy settlement plan nearly two years ago.

Christopher Hurley of Hurley McKenna & Mertz PC, an attorney for thousands of Boy Scouts abuse claimants, said he’s urging clients not to despair because Alito’s order won’t be permanent. Still, he said, the new reality is “really disappointing” and a letdown for survivors involved in the case.

Attorney Michelle Simpson Tuegel, who also represents abuse claimants who supported the Boy Scouts settlement plan, said she has mixed feelings about it. Although her clients deserve to be compensated as soon as possible, that they were forced to vote on a plan that contained third-party releases for entities tied to the Boy Scouts is disconcerting, said Tuegel.

“I hope that the Supreme Court makes it right,” she said.