Boy Scouts’ bankruptcy hits snag as judge rejects LDS Church’s $250M payout for abuse claims

Other parts of the plan win approval.

(Christopher Millette | Erie Times-News via AP) In this Feb. 18, 2020, file photo, Boy Scouts of America uniforms are displayed in a retail store in Pennsylvania. A bankruptcy judge has rejected a plan for The Church of Jesus Christ of Latter-day Saints to pay $250 million toward alleged victims of child sex abuse by Scout leaders and volunteers.

Dover, Del. • A Delaware bankruptcy judge has approved parts of the Boy Scouts of America’s reorganization plan but rejected other provisions, saying in a recent ruling that the organization has “decisions to make.”

One part Judge Laurie Selber Silverstein refused to approve was $250 million coming from The Church of Jesus Christ of Latter-day Saints to help settle claims alleging child sexual abuse by Scout leaders.

On Friday, Silverstein issued her 281-page ruling several months after holding a trial to determine whether to confirm the plan. She invited the Boy Scouts to request a status conference in the case.

The BSA issued a statement saying it was pleased that Silverstein overruled most of the objections to confirmation of its plan.

“We are committed to working with all constituents to make the necessary changes required by the ruling to drive this process forward,” the statement reads, “and we remain optimistic about securing approval of a final plan as soon as possible.”

The Boy Scouts sought bankruptcy protection more than two years ago to stave off a flood of lawsuits alleging child sexual abuse by Scout leaders and volunteers. It remains unclear when any of the 82,200 sexual abuse claimants in the bankruptcy might receive any compensation.

The plan calls for the Irving, Texas-based BSA and its 250 local councils, along with settling insurance companies and chartered troop-sponsoring organizations, to contribute some $2.6 billion in cash and property to a fund for abuse claimants. In return, those entities would receive liability releases shielding them from future lawsuits over Scouting-related abuse. The plan also allows abuse claimants to sue insurance companies and local troop-sponsoring organizations that do not enter into their own settlements within one year.

When it filed for bankruptcy, the BSA faced about 275 filed lawsuits and was aware of roughly another 1,400 potential cases, but more than 82,200 abuse claims were filed in the bankruptcy. Attorneys for BSA insurers argued early on that the sheer volume of claims was an indication of fraud and the result of aggressive client solicitation by attorneys and for-profit claims aggregators.

While some of those insurers later negotiated settlements for a fraction of the billions of dollars in liability exposure they potentially faced, other insurers continued to oppose the plan. They argued that the procedures for distributing funds to abuse claimants would violate their contractual rights to contest claims, set a dangerous precedent for mass tort litigation, and result in grossly inflated payments of abuse claims, including those that would otherwise be barred by the passage of time.

The case presented Silverstein with one of the most contentious issues for bankruptcy judges — whether third parties who are not bankruptcy debtors themselves can escape future liability by contributing to a Chapter 11 debtor’s reorganization plan. Such third-party releases, spawned by asbestos and product-liability cases, have been criticized as an unconstitutional form of “bankruptcy grifting,” where non-debtor entities obtain benefits by joining with a debtor to resolve mass-tort litigation in bankruptcy. Federal courts in some jurisdictions, including Delaware, have allowed such releases, while courts in other jurisdictions have rejected them.

The U.S. bankruptcy trustee, the government’s “watchdog” in Chapter 11 bankruptcies, argued that such releases are not allowed under the bankruptcy code and that the scope of the proposed releases in the BSA plan, potentially extending to tens of thousands of entities, was unprecedented.

In a key ruling, Silverstein approved the liability releases for non-debtor third parties, noting that the BSA, local councils and troop-sponsoring organizations work together to deliver the Scouting program.

“A lawsuit against a local council or a chartered organization, therefore, could have an immediate impact on BSA,” the judge wrote, noting that the releases are a “cornerstone” of the plan.

“As both the debtors and the (official committee of abuse claimants) stated over a year ago, without the potential for third-party releases, a BSA plan spirals into a ‘death trap’ of litigation with minimal recoveries in sight,” Silverstein wrote “.... Many survivors have been waiting for 30, 40 or even 50 years to tell their stories and receive a meaningful recovery. This plan makes that happen.”

The plan calls for the BSA itself to contribute less than 10% of the proposed settlement fund, consisting of property valued at about $80 million, an $80 million promissory note, and roughly $20 million cash.

The local BSA councils, which run day-to-day operations for troops, offered to contribute at least $515 million in cash and property, and an interest-bearing note of at least $100 million. That contribution was conditioned on certain protections for local troop-sponsoring organizations, which include religious entities, civic associations and community groups.

The bulk of the compensation fund would come from the BSA’s two largest insurers, Century Indemnity and The Hartford, which reached settlements calling for them to contribute $800 million and $787 million, respectively. Other insurers agreed to contribute about $69 million. The BSA’s former largest troop sponsor, The Church of Jesus Christ of Latter-day Saints, would contribute $250 million for abuse claims involving the Utah-based faith, while congregations affiliated with the United Methodist Church would contribute $30 million.

In a ruling that could have a significant impact on the case, Silverstein refused to approve the settlement involving the LDS Church. The judge noted that the settlement includes liability releases for non-Scouting abuse claims and “stretches third-party releases too far.”

The church ended its centurylong ties with the BSA in 2019, forming its own global youth program.

The judge also refused to make several findings demanded by the Boy Scouts and a group of abuse claimants called the Coalition of Abused Scouts for Justice as required precedents before a plan can be confirmed. Among those findings were that procedures for calculating the value of individual abuse claims were fair and appropriate, and that those values are based on, and consistent with, the BSA’s historical abuse settlements and litigation outcomes. Plan proponents also insisted that the judge find that the plan and trust distribution procedures were proposed “in good faith,” and that the findings would be binding on parties in any future court proceedings.

Silverstein also ruled that a committee of abuse claimants attorneys who would advise the trustee overseeing the victims compensation fund will have no consent or veto rights over procedures developed by the trustee, a retired federal judge, to ferret out fraudulent claims.

The Salt Lake Tribune has contributed to this story.