Boy Scouts bankruptcy exposes court split over liability waivers

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A recent ruling allowing Boy Scouts of America-related entities to be released from sex abuse claims has reignited debate over a controversial bankruptcy tactic and raised the stakes of an upcoming appellate court ruling involving Purdue Pharma LP. .

Judge Laurie Selber Silverstein of the U.S. Bankruptcy Court for the District of Delaware, in a long-awaited opinion released July 29, approved the bulk of the Boy Scouts’ complex reorganization plan and a $2.7 billion settlement with 82 000 adults who allege they were sexually abused in their youth as Boy Scouts.

His ruling coincides with a pending issue in the United States Court of Appeals for the Second Circuit on whether a bankruptcy court has the authority to approve non-consensual discharges of liability in a case brought by Purdue Pharma. .

The stark contrast in major cases that have captured national attention could ultimately lead to “a complete split in the circuit on the issue” that Congress or the Supreme Court will have to resolve, said bankruptcy attorney Steven Smith of Herrick Feinstein LLP.

Third-party releases have been part of Chapter 11’s revamp plans for decades. But they’ve recently drawn more attention because of their prominence in “cases that are in the public eye,” said Laura Coordes, a law professor at Arizona State University.

Other recent high-profile corporate Chapter 11 cases have been mired in strong opposition to reorganization terms that shield debtors and other affiliated parties from future lawsuits.

No explicit prohibition

Silverstein’s 281-page opinion explained why insurance companies, a network of 250 local councils and religious organizations that sponsor Scouting activities can receive the same legal liability waiver as Boy Scouts even if they don’t. never filed for bankruptcy. The alleged perpetrators of sexual abuse are not exonerated from their responsibility.

The judge found that victims of abuse can lose, without consent, their right to sue third parties who contribute to a mass settlement fund to pay them. The bankruptcy code “does not explicitly authorize releases, nor does it prohibit” such releases of liability, Silverstein said.

His position is consistent with the reviewing case law of the United States Court of Appeals for the Third Circuit, where Delaware sits. But it contradicts a notable December New York federal court ruling dismissing similar statements in Purdue Pharma’s bankruptcy plan for the opioid maker’s Sackler family owners.

“There’s this tension on the one hand with the courts finding ways to approve these plans because there’s an undeniable fact that world peace is the way to resolve contentious cases,” Smith said, making reference to settlements that have been reached with the aid of such releases. . “But at the end of the day, there’s no provision in the bankruptcy code that you can point to that allows it.”

hot topic

The bankruptcy code is silent on the issue of discharge of liability, except in cases used to resolve asbestos-related tort liabilities. In such cases, the law expressly permits settlement trusts and the channeling of all claims against the debtor and other parties related to the trust.

Outside of asbestos-related cases, a number of decisions have varied in authorizing waivers of liability. Different federal circuits have developed different tests and standards for determining whether releases can be approved over a party’s opposition, with some saying the code prohibits them.

“There’s a tension between the efficiency that proceeding in bankruptcy court can give you and the right of each claimant to have their day in court,” said bankruptcy attorney Shai Schmidt of Glenn Agre. Bergman & Fuentes LLP.

This tension has become more visible over the past three years with the bankruptcies of Purdue Pharma and the Boy Scouts. These debtors have been the subject of intense public outrage following the country’s opioid crisis and the passage of state laws designed to address decades of institutional neglect of child sexual abuse.

“People following these cases see what’s going on,” Coordes said. “There are so many parts to consider.”

These cases have also led Democrats in Congress to pursue legislation that would ban nonconsensual nondebtor discharge provisions in corporate bankruptcies.

Reaver’s Surprise

Last year, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York approved Purdue Pharma’s multibillion-dollar proposal to settle thousands of lawsuits over its addictive opioid painkillers. In a controversial decision, Drain said members of the Sackler family could be released from legal liability in exchange for contributing nearly $4.5 billion to the settlement.

But just three months later, Judge Colleen McMahon of the U.S. District Court for the Southern District of New York overturned Drain’s decision, saying the bankruptcy court had no authority to approve the releases.

In a ruling that sent shockwaves through corporate bankruptcy practitioners, McMahon said the issue “has hung over bankruptcy law for thirty-five years” and “should be put to rest now.” .

That opinion has since been cited by a federal district judge who overturned approval of third-party waivers in the bankruptcy plan for Ascena Retail Group, the former owner of several women’s fashion brands.

“We are now waiting for the second circuit to give its opinion,” said Smith.

Division of the circuit

With increasing scrutiny of third-party publications, the Boy Scouts’ decision “appears to buck the growing trend” even though it is “fairly consistent with the case law and authority” of the Third Circuit, a said Smith.

Silverstein’s detailed ruling cites Third Circuit cases to conclude that “the granting of releases to third parties is still permitted as part of the confirmation process.”

But the decision also rejects the Boy Scouts’ settlement with the Mormon Church, a longtime partner of the Boy Scouts, saying it went “too far” in releasing allegations of abuse that arose outside the courts. scouting activities.

His findings reinforce the idea that discharges “are not granted freely, especially in cases like this where there are hard facts,” said Allen & Overly LLP bankruptcy attorney Dan Guyder.

But “it could set the stage for more trickery,” he said.

The approval of the Boy Scouts’ plan marks a final break with McMahon’s decision.

Continued splits between the circuits on the issue will make “Supreme Court attention more likely,” Coordes said.

“You can see the differences starting to percolate,” Coordes said.

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