Boy Scouts of America – Files Chapter 11 as Changes to Legislation Make Strategy for Handling Abuse Cases Untenable

February 17, 2020 − Boy Scouts of America and one affiliated Debtor (“BSA” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10343. The Debtors, the largest scouting organization and one of the largest youth organizations in the United States, are represented by Derek C. Abbott of Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include (i) Sidley Austin LLP, as general bankruptcy counsel, (ii) Alvarez & Marsal North America LLC as financial advisors and (iii) Omni Agent Solutions as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Roy Williams (a former President and CEO of the Debtors, $2.4mn "Restoration" claim"), (ii) Robert Mazzuca (a former President and CEO of the Debtors, $1.6mn "Restoration" claim") and (iii) Wayne Brock (a former President and CEO of the Debtors, $1.4mn "Restoration" claim"). The majority of the Debtors' list of top 30 unsecured creditors are similarly former executives of the Debtors, with the smallest of these claims being $174k. The Debtors also filed a "List of 25 Law Firms With the Largest Number of Representations of Holders of Abuse Claims."

In a press release announcing the filing, the BSA advised that it “has filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code to achieve two key objectives: equitably compensate victims who were harmed during their time in Scouting and continue carrying out its mission for years to come. The BSA intends to use the Chapter 11 process to create a Victims Compensation Trust that would provide equitable compensation to victims."

Roger Mosby, the Debtors' President and Chief Executive Officer, added: "The BSA cares deeply about all victims of abuse and sincerely apologizes to anyone who was harmed during their time in Scouting. We are outraged that there have been times when individuals took advantage of our programs to harm innocent children. While we know nothing can undo the tragic abuse that victims suffered, we believe the Chapter 11 process – with the proposed Trust structure – will provide equitable compensation to all victims while maintaining the BSA's important mission."

In a letter to victims, Jim Turley, National Chair of Boy Scouts of America, continues with what is something of a novelty amongst the increasingly familiar attempts of non-profits to use bankruptcy proceedings to shed legacy liability related to sexual abuse: a genuine mea culpa: "As a father, a former Scout, and the National Chair of the Boy Scouts of America, I am truly heartbroken that you were harmed during your time in Scouting and that you carry unfathomable pain….As a father, a former Scout, and the National Chair of the Boy Scouts of America, I am truly heartbroken that you were harmed during your time in Scouting and that you carry unfathomable pain….The BSA firmly believes that a proposed Victims Compensation Trust structure is the best means of compensating victims in a way that is equitable and protects their identities. The BSA encourages victims to come forward to file a claim as the bankruptcy process moves forward and will provide clear and comprehensive notices about how to do so."

Plan Overview

The Debtors' Disclosure Statement provides: "The Plan provides for the reorganization of the Debtors as a going concern and will enable them to continue the BSA’s mission. Specifically, the Plan contemplates (i) the establishment of a Victims Compensation Trust for the benefit of holders of Abuse Claims that shall assume liability for all Abuse Claims and hold, administer, and distribute Trust Assets for the benefit of holders of Abuse Claims, and the channeling of all Abuse Claims to such trust, (ii) making distributions to holders of General Unsecured Claims, (iii) restructuring certain of the Debtors’ prepetition Secured Claims, and (iv) entering into the Exit Facility."

The following is a summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and Disclosure Statement):

• Class 1 (“Other Priority Claims“) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%.
• Class 2 (“Other Secured Claims“) is unimpaired deemed to accept and not entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%.
• Class 3A (“2010 Credit Facility Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%. Treatment: The Reorganized Debtors shall enter into, execute and deliver the Restated 2010 Credit Facility Documents.
• Class 3B (“2019 RCF Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%. Treatment: The Reorganized Debtors shall enter into, execute and deliver the Restated RCF Documents.
• Class 4A (“2010 Bond Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%. Treatment: The Reorganized Debtors shall enter into, execute and deliver the Restated 2010 Bond Documents.
• Class 4B (“2012 Bond Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%. Treatment: The Reorganized Debtors shall enter into, execute and deliver the Restated 2012 Bond Documents.
• Class 5 (“General Unsecured Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is [ ]%. Treatment:  Each holder shall receive such holder’s Pro Rata share of the GUC Plan Distribution.
• Class 6 (“Abuse Claims“) is impaired and entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is [ ]%. Treatment: As of the Effective Date, liability for all Abuse Claims shall be assumed in full by the Victims Compensation Trust without further act, deed, or court order and shall be satisfied solely from the Victims Compensation Trust as set forth in the Trust Documents. Pursuant to the Channeling Injunction, set forth in Article IV of the Plan, each holder of an Abuse Claim shall have his or her Abuse Claim permanently channeled to the Victims Compensation Trust, and such Abuse Claim shall thereafter be asserted exclusively against the Victims Compensation Trust and resolved in accordance with the terms, provisions, and procedures of the Trust Documents.
• Class 7 (“Interests in Delaware BSA, LLC“) is unimpaired deemed to accept and not entitled to vote on the Plan. Estimated aggregate claims are $[ ] and projected recovery is 100%.

Prepetition Capital Structure

Events Leading to the Chapter 11 Filing

In an "Informational Brief" [Docket No. 4], the Debtors detail the state of play as to existing sexual abuse claims and the impact that recent legislative changes have had on their strategy for dealing with those claims. Although the Debtors' credit in part "a robust set of expert-informed policies and procedures" that began in the 1980s for the shop drop in claims during recent decades, they clearly are concerned by a second key variable as to the number of claims: statutes of limitation ("SOLs"). Extensive vetting of scout employees/volunteers may very well have reduced the numbers of potential claimants in recent years, but changes in statutes of limitation now threaten to throw open once closed doors to the Debtors' less careful past. The Debtors' strategy of quietly handling a few individual cases each year (even if perhaps more costly on a per case basis) has gradually become less tenable since legislation (extending SOLs) began changing in 2002; with settlements for the 2017-2019 period skyrocketing to $150.0mn and set to grow as more states adopt similarly threatening SOLs. The Debtors need to get their cost per victim down and they need to do so with both speed and certainty. Bankruptcy stands to offer the certainty, but the Debtors also urge the Court and stakeholders as to need for speed, arguing that it is "imperative that the Debtors’ reorganization proceedings not become mired in endless discovery, unyielding litigation, or other hallmarks of inefficiency. As a non-profit corporation that relies largely on registration fees and donations, considerations of economy and speed are of the utmost importance to the BSA."

In Court filings, the Debtors state: "As widely reported, the BSA is currently a defendant in numerous lawsuits related to historical acts of sexual abuse in its programs. In addition to the approximately 275 lawsuits pending in state and federal courts across the United States, attorneys for abuse victims have provided information regarding approximately 1,400 additional claims not yet filed, for a total of approximately 1,700 known asserted abuse claims. Approximately 90% of pending and asserted claims relate to abuse that occurred over thirty years ago." 

The Debtors continue: "Many abuse victims have taken legal action against the BSA and Local Councils in the civil tort system. Recent changes in state statutes of limitations have led to a sharp increase in the number of claims asserted against the BSA and placed tremendous financial pressure on the organization. Since 2002, approximately 17 states have enacted legislation allowing victims of sexual abuse to assert claims that previously would have been barred by applicable statutes of limitation. The trend accelerated in 2019, when more than a dozen states enacted such legislation. The BSA expects that, but for the commencement of these chapter 11 cases and the imposition of the automatic stay, additional abuse lawsuits would continue to be filed in light of this recent legislation. In January 2020, for example, a group of plaintiffs filed suit in the U.S. District Court for the District of Columbia alleging that the District’s recent revival-window legislation permits plaintiffs to bring previously time-barred claims, regardless of where the abuse occurred or where the plaintiff resides.

The BSA cannot continue to address abuse litigation in the tort system on a case-by-case basis. The BSA spent more than $150 million on settlements and legal and related professional costs from 2017 through 2019 alone. In addition to the unsustainable financial cost of continuing to engage in piecemeal litigation across the country, continuing this process will result in the risk of inconsistent judicial outcomes and inequitable treatment of victims. 

Under these circumstances, the Debtors have commenced these chapter 11 cases to achieve dual objectives: (a) timely and equitably compensating victims of abuse in Scouting and (b) ensuring that the BSA emerges from bankruptcy with the ability to continue its vital charitable mission.

Prolonged bankruptcy proceedings would imperil both of these objectives. It is therefore imperative that the Debtors’ reorganization proceedings not become mired in endless discovery, unyielding litigation, or other hallmarks of inefficiency. As a non-profit corporation that relies largely on registration fees and donations, considerations of economy and speed are of the utmost importance to the BSA."

About the Debtors

The Debtors are the largest scouting organization and one of the largest youth organizations in the United States, with about 2.3 million youth participants and about one million adult volunteers. The BSA was founded in 1910, and since then, about 110 million Americans participated in BSA programs at some time in their lives.

The Debtors state: "The Boy Scouts of America provides the nation's foremost youth program of character development and values-based leadership training, which helps young people be "Prepared. For Life.®" The Scouting organization is composed of nearly 2.2 million youth members between the ages of 5 and 21 and approximately 800,000 volunteers in local councils throughout the United States and its territories."

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