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The Boy Scouts Are Abusing the Bankruptcy System

Nov. 16, 2021, 9:00 AM

When “Michael” (not his real name) was between 17- and 19-years-old, he was allegedly repeatedly raped by a pair of uniformed, on-duty Louisville, Ky., policemen, including in their police car. Michael was with the policemen because he was a member of a Boy Scout troop sponsored by the Louisville Police Department. The Louisville police would sometimes take Scout troop members like Michael with them on ride-alongs outside of formal Scouting events, and that is when the rapes allegedly occurred.

The police officers involved were convicted of various lesser sex crimes against Michael and others. The city of Louisville, however, was poised to escape liability for the criminal actions of its on-duty officers, without going to trial or even paying a single cent of its own money, simply because the Boy Scouts of America filed for bankruptcy in February 2020. All of the claims involving seven lawsuits filed against the Boy Scouts and the city were resolved through a settlement reached Oct. 29, according to a release from the Louisville-Jefferson County Metro Government. Under the settlement, Louisville itself will not pay anything; only its insurers will.

Meanwhile, an estimated 40,000 other sex abuse defendants that sponsored Scout troops. All of them are attempting to piggyback on the Boy Scouts’ bankruptcy to evade their own liability—from 1976 forward—for the sexual abuse of Scouts, without paying a penny of their own money or having to face a jury. This is wrong.

An Abuse of Bankruptcy Discharge

The basic idea of bankruptcy is that an insolvent company surrenders its assets, which are used to pay creditors in an orderly fashion under court supervision. Abuse survivors are creditors, even if their cases against the Boy Scouts have not been resolved. To the extent that creditors are not paid, the debts are discharged, meaning they are no longer collectible.

The bankruptcy discharge is supposed to be available only for parties that file for bankruptcy. Yet the Boy Scouts are proposing a settlement through their bankruptcy plan that would give independent, well-heeled, sex abuse defendants, including municipalities, community organizations, schools, and churches, the benefits of a bankruptcy discharge, without having to go through the bankruptcy process that would make their assets available to compensate abuse survivors.

Under the plan proposed by the Boy Scouts, all of its troop sponsors—entirely independent non-bankrupt entities—will receive releases for their sex abuse liability. The releases even go so far as to erase any liability for abuse that occurred while the children were in the custody of outside organizations, as in the case of Michael.

In exchange for the releases, the troop sponsors will have to sign over their right to insurance coverage under shared policies paid for by the Boy Scouts to a trust to compensate survivors—but that’s all. The troop sponsors will not themselves pay anything for their releases, even though individual abuse claimants will get less than 25 cents on the dollar on their claims—and in many cases far less—under the Boy Scouts’ plan.

Critically, bankruptcy law is clear that if the plan is approved by the bankruptcy court, it will bind all creditors, including abuse survivors, even if they object.

Appalling Bankruptcy Plan Is Not New

The releases of non-debtors under the Boy Scouts’ appalling bankruptcy plan is hardly unique. While bankruptcy courts would not historically approve releases of non-debtors, that has changed, and now wealthy tort defendants now regularly piggyback on others’ bankruptcy cases.

This is how the billionaire Sackler family sloughed off its opioid liability in the Purdue Pharma bankruptcy. It’s how Catholic parishes shielded their assets in diocesan sex abuse bankruptcies. It’s how the U.S. Olympic Committee is hoping to use USA Gymnastics’ bankruptcy to limit its liability for Larry Nasser’s sexual abuse of Olympic gymnasts. And it’s how Johnson & Johnson, one of the world’s richest companies, is seeking to evade its liability for toxic talc products in the bankruptcy of one of its subsidiaries.

Mass tort cases are always difficult, but their resolution does not require running roughshod over victims’ right to hold accountable those with responsibility for their harms. The Boy Scouts, for example, are perfectly able to continue their mission without the court extinguishing the liability of myriad non-debtor troop sponsors.

The troop sponsors’ own liability for abuse would certainly remain an issue, but that would be the problem of individual troop sponsors, and there’s a solution readily at hand for them if they are truly insolvent: they can file for bankruptcy themselves and make all of their assets available for their creditors.

Allowing deep-pocketed troop sponsors to evade liability for decades of sexual abuse of boys and young men by riding the coattails of the Boy Scout’s bankruptcy is a misuse of the bankruptcy system and should not be allowed.

The Boy Scouts of America have asked the court to approve a $1.6 billion trust fund to settle the more than 80,000 sexual abuse claims. The court will hold a hearing on the proposal in late January.

The benefits of bankruptcy relief should be available only for those individuals and businesses that actually file for bankruptcy. It’s an abuse of the bankruptcy system for well-heeled defendants to get releases from their own liability by free-riding on the bankruptcies of other entities. The House Judiciary Committee Nov. 3 approved the Nondebtor Release Prohibition Act, a bill that would end this abuse of the bankruptcy system. It’s time for Congress to pass this legislation and ensure that bankruptcy relief is available for honest but unfortunate debtors and not for free-riders who would grift the process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Adam J. Levitin is the Anne Fleming Research Professor and Professor of Law at Georgetown University Law Center. He serves as a consultant to certain talc claimants against Johnson & Johnson and has testified before the House Judiciary Committee on non-debtor releases in bankruptcy.

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