Lujan Claimants v. Liberty Mutual Ins. Co

Summary

In Lujan Claimants v. Liberty Mutual Ins. Co. (In re Boy Scouts of American), ___ F.3d ___ (3rd Cir. May 13, 2025) (“BSA”), the United States Court of Appeals for the Third Circuit (the “Third Circuit”) affirmed the United States District Court’s affirmation of the Bankruptcy Court’s confirmation of the reorganization plan of the debtors that provided for, among other things, unconsented releases of third parties by certain creditors notwithstanding the Supreme Court’s recent intervening prohibition of such releases in Purdue Pharma L.P., 603 U.S. 204 (2024) (“Purdue”).  It found that the issue had been mooted before the Supreme Court ruled in Purdue, because no stay pending appeal had been granted by then.  However, the court’s panel was divided on whether the mootness was statutory per two of the justices or equitable per a concurring opinion by the third justice. 

BSA can be found here. 

Facts

The Boy Scouts of America was facing mounting claims for sexual abuse.  Accordingly, it and an affiliate (together, the “Debtors”) filed Chapter 11 cases in 2020.  After lengthy and difficult negotiations with various constituencies, the Debtors filed a plan of reorganization (the “Plan”).  Among other things, it provided for a buyout by the Debtors of the liability policies it had with various insurers.  The insurers provided a specified, substantial amount of cash to the Debtors in return for a release by the Debtors and a plan-specified release of the insurers by the sex abuse claimants which did not require the claimants to agree to the release of the insurers.  The plan created a trust for the benefit of claimants that was funded from the payments by the insurance companies and substantial contributions by the Debtors and certain affiliated nondebtors.  All voting classes voted for the plan.  However, as noted below, certain creditors filed confirmation objections, some of the sex abuse creditors among them.  The sex abuse creditors objected to the nonconsensual releases.  After issuing a preliminary order covering various but not all elements of the Plan, the Bankruptcy Court confirmed it by an order in September of 2022.  The District Court and Third Circuit affirmed.  As noted above, the Third Circuit found that the release appeal issue was moot under Bankruptcy Code (the “Code”) § 363(m) which moots appeals of certain sale orders if no stay pending appeal has been granted. 

Reasoning

Statutory Mootness.  In its ruling, the Third Circuit majority relied on § 363(m).  That section insulates a good faith purchaser from the estate against a reversal of the sale order unless the order involved has been stayed on appeal.  The appealing sex abuse creditors did not obtain such a stay.  Thus, Purdue, which was decided while the appeal in BSA was pending, did not govern, the appeal having been mooted by § 363(m).

In so ruling, the majority rejected several arguments by the appealing sex abuse creditors why § 363(m) did not govern.  One was that the sale not yet occurred because much the funds from the insurers were being held in escrow until a final order on appeal.  The majority basically said that did not matter because the funds were there and some had already had been transferred to the Trust.  Another was that § 363(m) only applies to freestanding sales, not sales that are part of a plan.  This the majority said was contrary to Third Circuit precedent (a claim that the concurring opinion categorically rejected, as noted below).  A third argument was that the appellants were not trying to invalidate the sale, but only the unconsented release term of the plan.  This the opinion dealt with summarily by pointing out that loss of that protection deprived the insurer “buyers” of the benefit of their bargain.  The final appeal theory was that the ruling would moot any plan that included a Bankruptcy Code § 363(b) sale.  To this the court replied that most such challenges would not contest the validity of the sale, but some other aspect of the subject plan. (Here the court fails to note that a challenge to a sale is not alone the basis of statutory mootness; the situation must also include a failure to get a timely stay pending appeal, something that is within the control of the subject court to grant or deny consistent with applicable standards, which evidently appellants did not obtain.) 

Equitable Mootness.  Finding that statutory mootness did not apply, the concurring opinion relied instead on equitable mootness.  Support for this conclusion can be found in § 363(m) itself.  Its language makes no reference to proceedings outside of sale, including a plan.  Instead, it applies expressly only to stand-alone sales under § 363(b) (sale or lease out of the ordinary course) or § 363(c) (ordinary course use of property).  The opinion also distinguishes the cases on which the majority relies as Third Circuit authority for statutory mootness with respect to a plan sale.  Indeed, in BSA the releases are not accomplished by a sale order but by confirmation of the Plan in whole.  And in fact some the insurers required that the buyback not be final until a confirmation order was final.  Hence, in spite of what the majority said on the issue, the buyback sale was not completed, the concurrence judge also disagreeing with the majority over whether the funds holdback in escrow meant that the sale had not closed. 

The concurrence judge also found several policy reasons for rejecting the application of § 363(m).  One is that parties will be able to structure plans to prevent review on appeal by including a “sale” (however meaningless) in the plan that can moot any appeal under § 363(m) (absent a stay, of course; and a bankruptcy court could refuse to confirm a plan in which a “sale” served only the end of implicating § 363(m) to moot any appeal).

Having concluded that § 363(m) does not apply, the concurrence nevertheless voted to affirm the confirmation order because it found the appeal to be equitably moot.  The Plan clearly was substantially consummated and denial of confirmation would deprive parties of a substantial elements of the benefit of their bargain.  In applying equitable mootness, the opinion noted that ultimately, application of the doctrine is within the discretion of the courts, giving them more flexibility than statutory mootness to reach an equitable result worthy of a court of equity such as a bankruptcy court. 

Author’s Comment

The author agrees with the outcome of the case.  However, in the author’s view equitable mootness is the superior route to that result.  As the concurring opinion notes, some of the majority’s rationales are off the mark, at best strained (such as the applicability of the Third Circuit cases on which the majority relies).  And the concurring opinion makes a good case why § 363(m) by its terms does not apply to a confirmation order.  Finally, as the concurring opinion notes, applying § 363(m) in like circumstances can lead to abuses.  This last point implicates an issue mentioned repeatedly above that neither side of the debate appears to have discussed:  § 363(m) applies only if there is no stay pending appeal, giving a bankruptcy or appellate court the ability to avoid unjust results (if asked) by granting stay pending appeal, thus shutting off mooting an appeal. 

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  These materials were authored by Adam A. Lewis, Senior Counsel (Ret.), Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Hon. Meredith Jury (U.S. Bankruptcy Judge. C.D. Cal., Ret.), a member of the ad hoc group.  The opinions expressed herein are solely those of the author.