On January 13, 2025, the United States District Court for the District of Delaware affirmed the decision by the Delaware Bankruptcy Court, holding that an unofficial committee representing tens of thousands of sexual abuse victims was not entitled to be reimbursed for its fees from the Boy Scouts’ bankruptcy estate. The case is Coal. of Abused Scouts for Just. v. Off. of the United States Tr. (In re BSA), 2025 US Dist. LEXIS 6658 (D. Del. Jan. 13, 2025), and it has several possible takeaways, including:
- Procedural Requirements: Motions for reimbursement of fees must be filed by the appropriate party.
- Avoid Duplication of Services: Creditors and ad hoc committees must demonstrate that their services are unique and not duplicative of those performed by other parties involved in the case.
- Substantial Contribution Standard: Applicants must clearly show that their services provide a direct, significant, and demonstrable benefit to the estate, and were primarily designed to benefit the estate rather than their own pecuniary interests.
- Detailed Fee Statements: Applicants should review and itemize their fee statements to assess which services benefitted the estate.
- Consistency in Representations: Parties must ensure that their representations to the court and their clients about their fees are consistent and support the requested relief.
Below we explore the decision in more detail.
Coal. of Abused Scouts for Just. v. Off. of the United States Tr. (In re BSA), 2025 U.S. Dist. LEXIS 6658 (D. Del. Jan. 13, 2025)1
The Boy Scouts of America and the Delaware BSA LLC (collectively, the Boy Scouts) filed for relief under Chapter 11 of the Bankruptcy Code on February 18, 2020, before the Bankruptcy Court for the District of Delaware (Bankruptcy Court), due to numerous lawsuits alleging sexual abuse by adult volunteers. Following the Boy Scouts’ filing, the US Trustee appointed two official committees under Section 1102(a)(1) – one to represent all trade creditors and another to represent all sexual abuse tort claimants (TCC). Notwithstanding the appointment of TCC, certain tort lawyers representing tens of thousands of sexual abuse victims (State Court Counsel) formed an unofficial committee (Coalition) to advocate for the interests of its constituents.
The employment agreements with the Coalition’s bankruptcy lawyers (collectively, Coalition Bankruptcy Counsel) provided that “State Court Counsel would direct their actions and pay [the Coalition Bankruptcy Counsel] for their services.” In its verified statement under Bankruptcy Rule 2019, the Coalition stated that “[Coalition Bankruptcy Counsel] are being paid by State Court Counsel. Coalition members [(i.e., the State Court Counsels’ personal injury client)] will not, in any way, be responsible for the fees of Coalition Bankruptcy Counsel.”
Eventually, the Boy Scouts filed a motion (RSA Motion) seeking authority to enter into a restructuring support agreement (RSA) with, among others, the Coalition. In the RSA, the Boy Scouts proposed to pay the Coalition Bankruptcy Counsel’s fees under Section 363(b). The Boy Scouts also proposed that it would pay the Coalition Bankruptcy Counsel as much as $950,000 every month until the effective date of its plan. Finally, the RSA proposed that, on the plan’s effective date, the Boy Scouts would reimburse State Court Counsel for fees paid or owing to the Coalition Bankruptcy Counsel up to $10.5 million, with any remaining amounts paid or owed to be paid by the settlement trust for sexual abuse victims.
The Bankruptcy Court denied the RSA Motion, finding that it could not determine, based on information submitted in support of the RSA Motion, whether the proposed payment to the Coalition satisfied Section 363(b)’s requirement because the Coalition had not provided any invoices to the Boy Scouts, the Boy Scouts had not requested the invoices, and the Boy Scouts negotiated “in the absence of any knowledge of” the fees being satisfied. Moreover, the Boy Scouts admitted that it could not determine whether any amounts agreed to be paid would be for services rendered “to advance [the Coalition’s] own special interests as opposed to ... the interest of all personal injury claimants.” The Bankruptcy Court concluded that “[i]n the circumstances of this case, . . . it is necessary to see the outcome of the Coalition’s efforts before determining whether its professionals’ fees and expenses could be paid from funds of the Debtors’ bankruptcy estates.” As such, the Bankruptcy Court left it up to the parties to the RSA to determine whether they would proceed with the RSA without certain provisions. But no party ever submitted a revised order containing the changes directed by the Bankruptcy Court, and no order was entered authorizing the Boy Scouts to enter the RSA. As for the Boy Scouts’ plan, the Bankruptcy Court repeatedly stated that it would not approve a plan that paid the Coalition’s professionals’ fees.
Thereafter, the Boy Scouts filed its modified fifth amended plan, which provided that the Coalition’s professionals’ fees would be capped at $21 million but made their payment “subject to the Bankruptcy Court granting a motion filed pursuant to [S]ections 363(b), 1129(a)(4) and 503(b) [], Bankruptcy Rule 9019, or otherwise applicable bankruptcy and non-bankruptcy law[.]” Although the Bankruptcy Court’s opinion supporting the confirmation order stated that the Boy Scouts’ agreement with respect to the Coalition's fees will be brought separately, the Boy Scouts never filed a separate motion requesting that their bankruptcy estates be authorized to pay the Coalition’s professionals’ fees.
On December 29, 2022, the Coalition filed a motion “for Entry of an Order Approving the Debtors’ Proposed Payment of the Coalition Restructuring Expenses” (Coalition Reimbursement Motion), seeking payment of $21 million in fees and expenses incurred by the Coalition Bankruptcy Counsel. Despite the Coalition Reimbursement Motion’s styling that it sought an order approving the Boy Scouts’ “proposed” payment, it was the Coalition’s request. Indeed, the Boy Scouts did not submit any pleadings or present argument in support of the Coalition Reimbursement Motion.
In support of their motion, the Coalition argued that the professionals’ fees should be paid from the Boy Scouts’ bankruptcy estates as an administrative expense either (i) under Section 363(b), as a sound exercise of the Boy Scouts’ business judgment, or, in the alternative, (ii) as a substantial contribution award under Section 503(b)(3)(D) and (4). The US Trustee objected to the Coalition Reimbursement Motion, arguing that (i) the Coalition did not have authority under Section 363(b) to seek such relief and (ii) the Coalition had not met its burden under Section 503(b)(3)(D) and (4) because it did not show that it “did not merely act in its own interest and that its services were not duplicative of actions taken by other parties.” The Coalition and the US Trustee eventually reached an agreement whereby the US Trustee withdrew his objection if the Coalition Reimbursement Motion was predicated on Section 503(b), not Section 363(b). Notwithstanding the agreement, the Bankruptcy Court denied the Motion.
The Coalition appealed the Bankruptcy Court’s decision to the District Court, arguing that its efforts in the bankruptcy case warranted reimbursement under Sections 363(b) and 503(b). In affirming the Bankruptcy Court’s decision, the District Court’s analysis focused on several key issues. First, the District Court found that the Coalition Reimbursement Motion was not procedurally proper under Section 363(b) because it was not filed by the Boy Scouts (i.e., the Debtors). Section 363(b) allows a trustee or debtor in possession to use estate property outside the ordinary course of business. Thus, only a trustee or debtor could use Section 363(b). But the Coalition, as an ad hoc committee, lacked the authority to invoke this provision.
Second, the District Court examined whether the services performed by the Coalition provided a substantial contribution to the Boy Scouts’ bankruptcy case under Section 503(b). The District Court found that many of the Coalition Bankruptcy Counsel’s services duplicated those of the Boy Scouts and the TCC. Indeed, the Coalition Bankruptcy Counsel’s fees spanned a wide range of activities, many of which overlapped with duties imposed upon the Boy Scouts and the TCC. Moreover, the Coalition failed to demonstrate that their efforts transcended self-interest and provided a direct, significant, and demonstrable benefit to the estate. Additionally, the District Court highlighted the Coalition’s failure to review and itemize their fee statements to assess which services were beneficial to the estate. This lack of detailed analysis undermined the Coalition’s request for reimbursement.
In conclusion, the District Court affirmed the Bankruptcy Court’s decision, denying the Coalition’s motion for reimbursement of their fees. The District Court emphasized the importance of proper procedural mechanisms, avoiding duplication of services, and meeting the substantial contribution standard to justify reimbursement from the estate.
__________
1 All citations, quotations, etc. for this analysis are from the opinion of the United States District Court for the District of Delaware, Coal. of Abused Scouts for Just. v. Off. of the United States Tr. (In re BSA), 2025 U.S. Dist. LEXIS 6658 (D. Del. Jan. 13, 2025).
[View source.]
