Mediation And The Boy Scouts Bankruptcy: From A Court Opinion On Plan Confirmation

“Without these [mediated] settlements, there is no Plan.”

From Opinion on Plan confirmation, In re Boy Scouts of America, Case No. 20-10343, Delaware Bankruptcy Court, Doc. 10136, at 80 (issued July 29, 2022).

The Boy Scouts of America bankruptcy has achieved a milestone: on July 29, 2022, the Bankruptcy Court issues a 281-page Opinion on confirmation of Debtor’s Plan of Reorganization. The Opinion is generally favorable toward Plan confirmation but identifies a number of issues remaining to be resolved.

What follows is a summary of the case and how mediation has played a pivotal role, taken from the July 29, 2022, Opinion.

Background

This is an extraordinary case by any measure: it is a mass tort case involving sexual abuse claims.

The Debtor, Boy Scouts of America (“BSA”), is a household name. It is a national, nonprofit organization. Over the one hundred plus years of its existence, BSA has delivered its Scouting mission through, and in partnership with, tens of thousands of non-debtor entities.

This is a case about trust—or more accurately—lack of trust. Boys and their families put their faith in a lionized institution, which failed many of them. These boys—now men—seek and deserve compensation for the sexual abuse they suffered years ago. Such abuse has had a profound effect on their lives, for which no compensation will ever be enough.

They also seek to ensure that, to the extent BSA survives, there is an environment where sexual abuse can never again thrive or be hidden from view.

This is an emotionally charged case, with 82,209 claimants filing proofs of claim asserting sexual abuse:

Claimants have actively participated in this case through an official creditors committee, an ad hoc committee and pro se;
The court has received over 1000 letters from claimants who each have their own story to tell, many for the first time; and
Given what is at stake, it is not surprising that claimants hold strongly different views on how this case should conclude, even whether this debtor should continue to exist.

This is also a case about an institution that seeks to continue serving boys and girls across the country, providing them with opportunities to learn self-sufficiency and leadership skills that can contribute to the betterment of society.

Boy Scouts of America

BSA was created in the District of Columbia “by An Act of the Seventy-Fourth Congress of the United States on December 6, 1915 and signed into law by President Woodrow Wilson on June 15, 1916.”

It’s mission as a nonprofit entity is to “promote, through organization, and cooperation with other agencies, the ability of boys to do things for themselves and others, to train them in Scoutcraft, and to teach them patriotism, courage, self-reliance, and kindred virtues, using the methods which are now in common use by Boy Scouts.”

–Local Councils

BSA sets the content and structure of the Scouting program but relies on its 250 Local Councils. Each Local Council:

covers a set geographical area within the United States;
is a separate, independent non-profit entity organized under the laws of its respective state;
is subject to an annual chartering process, and BSA can refuse to renew or revoke a charter at any time in its sole discretion—in the best interest of Scouting;
is charged with ensuring that BSA’s Scouting program is available in the Local Council’s area by maintaining standards and policies and making recommendations on unit leadership and finances;
is responsible for its own operations, programming, fund raising and recruiting members;
owns and operates its own camp and provides educational programs and leadership training;
collects membership fees and supports the sale of Scouting merchandise;
recruits Scouts and leaders and enforces BSA rules and regulations; and
has given a residual interest in all its property to BSA.

–Chartered Organizations

BSA also relies on tens of thousands of Chartered Organizations (religious, civic or community institutions) that help Local Councils by, (i) providing facilities for Scout meetings and other local infrastructure, and (ii) participating in Local Council leadership.

Chartered Organizations utilize the Scouting program to further their own youth-related goals.

Sexual Abuse Lawsuits

Notwithstanding their laudable mission, BSA and its Local Councils and Chartered Organizations are named as defendants in hundreds of lawsuits alleging sexual abuse.

The complaints detail horrific allegations ranging from harassment to inappropriate touching to penetration. Some complaints detail one event of abuse while others detail a protracted grooming process.

Some complaints contain lengthy and detailed allegations of rampant child abuse within Scouting ranks since at least 1920 and further allege that BSA kept secret records of volunteers alleged to have molested Scouts.

Plaintiffs seek both economic and non-economic damages, punitive damages and non-monetary relief such as posting the names of known abusers, establishing a toll free number to report abuse and sending letters of apology.

Insurance Coverage

BSA has had comprehensive general liability insurance in place covering abuse claims since at least 1935:

1935 – 1971 and 1979 – 1996, Insurance Company of North America (Century) issues primary insurance policies to BSA with per occurrence limits, but no aggregate limits for abuse claims;
1971 – 1978, Hartford issues primary policies to BSA with per occurrence limits, but no aggregate limits for abuse claims;
1969 – 1982, BSA begins purchasing excess insurance policies, with per occurrence limits, but no aggregate limit;
Beginning in 1983, BSA insurance policies provide aggregate limits for abuse claims;
1986 – 2018, BSA’s primary policies require BSA to pay before excess coverage attaches and its excess policies provide over $140 million in coverage; and
Today, some insurance policies are exhausted and some insurers are insolvent, but $3.6 billion worth of aggregated coverage is available, the actual value of which will not be known until all claims have hit the policies and been paid.

Insurance coverage for Local Councils, through BSA policies, is as follows:

Before 1971, Local Councils are not covered under BSA insurance policies—but 300 Local Councils have a Scout Blanket Liability Program with limits of $250,000, $500,000 or $1,000,000;
1971 – 1974, Local Councils can pay a premium to become an additional insured under BSA’s liability policies—many do so;
1975 – 1977, all Local Councils become additional insureds on BSA policies;
1978 – present, BSA implements a General Liability Insurance Program under which all Local Councils are named insureds under BSA’s policies; and
Various other policies have existed as well.

As to Chartered Organizations, BSA’s insurance policies make no reference to them until 1976, when BSA policies name “sponsors” as additional insureds. In 1978, BSA begins including Chartered Organizations as insureds under its policies.

–Prepetition Coverage Litigation

Before the bankruptcies are filed, abuse lawsuits begin in Illinois, with allegations about a repeat abuser. Insurers respond with attempts to escape liability under their policies, on various grounds.

One insurance company, for example, files a lawsuit seeking declarations that it, (i) has no liability under its excess policies for abuse allegations involving the repeat abuser, and (ii) has no duty to defend or indemnify.

BSA and Local Councils sue various other insurers that deny coverage, seeking declarations that the insurers are liable under their policies.

–Prepetition Resolutions and Attempts to Resolve Abuse Claims

In August 2016, Debtors retain a law firm as its national coordinating counsel to oversee abuse litigation. During its engagement (through February 2020), such firm resolves 250 of the 350 claims it handles.

Meanwhile, by the end of 2019:

BSA is a named defendant in 275 lawsuits asserting abuse claims;
State legislation loosens applicable statutes of limitations, resulting in acceleration of the pace of lawsuit filings;
BSA is aware of 1400 other claims not yet filed as lawsuits;
BSA has spent more than $150 million on fees and settlements, and its finances are strained; and
BSA decides that it cannot continue addressing abuse claims on a case-by-case basis and attempts to mediate a resolution of abuse claims as a group—this effort fails.

Bankruptcy Begins

So, on February 18, 2020, various BSA entities file voluntary petitions under Chapter 11 of the Bankruptcy Code. In the bankruptcy cases:

Two committees are formed (Unsecured Trade Creditors Committee and Tort Claimants Committee);
A future claims representative is appointed;
An ad hoc committee of Local Councils is formed;
A self-named Coalition of Abused Scouts for Justice announces its appearance in the case;
Over 9500 motions, objections or other documents appear on the BSA docket;
More than 100,000 proofs of claim are filed—including 82,209 unique and timely claims asserting abuse claims; and
Various law firms that advertised extensively about rights of abuse victims are retained by thousands of clients alleging abuse at the hands of BSA.

Mediation and Results

On the first day of the bankruptcies, Debtors seek a mediation process. After a contested hearing, the Court appoints three mediators “for the purpose of mediating the comprehensive resolution of issues and claims in BSA’s chapter 11 case through a chapter 11 plan.”

Through the beginning of the confirmation hearing, twelve mediator reports are filed with information on the progress of mediation efforts and on settlement agreements.

Plan-related settlements achieved, through mediation, include:

Payment of $871 million from certain insurance companies;
Payment of $665 million from Local Councils;
Payment of $40 million on account of Chartered Organizations–this settlement also establishes and clarifies a baseline for resolution of coverage disputes involving Chartered Organizations;
Up to an additional $100 million from BSA and Local Councils, tied to future membership increases through Chartered Organizations’ continued sponsorship of Scouting Units;
Payment of $52.5 million from another insurance company;
Payment of $16.5 million from another insurance company;
Payment of $30 million from a Chartered Organization, that also agrees to lead a $100 million fundraising effort with other Chartered Organizations and continue partnering with BSA through 2036;
Another Chartered Organization agrees to work with BSA and Local Councils to improve Scouting through 2036;
Tort Claims Committee agrees to withdraw its opposition to the Plan and to various mediated settlements, with various non-monetary stipulations; and
Additional insurer settlements bring $1.66 billion into the bankruptcy estate;

Regarding such mediation results, the Court concludes: “Without these [mediated] settlements, there is no Plan.”

Conclusion

One of the benefits of the Bankruptcy Court’s lengthy Opinion on Plan confirmation issues is this:

It provides an overview of the entire Boy Scouts situation;
It explains how the bankruptcy cases have progressed; and
It shows how mediation has played a critical role in the pursuit of a confirmable plan of reorganization.

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