By Sean T. Cork, BAMF Lawyer
The big news item on February 18th was the chapter 11 bankruptcy filing of the Boy Scouts of America. A bankruptcy filing by a well-known company or organization is always accompanied by a multitude of questions about the bankruptcy process itself and what the filing means for the future of the debtor. While the eventual outcome of the case is far from certain, it is possible to glean some basic information about the case from what has been filed in the court so far.
How Will the Bankruptcy Affect Local Scout Troops?
Best to begin with the basics. According to court filings, there are more than 81,000 local scouting units in the United States. These scouting units are organized and supported by 261 local councils. The scouting units and local councils are where the actual scouting gets done, and these are the organizations with which most people who get involved with scouting will interact.
It is important to note that none of the local scouting units or local councils filed for bankruptcy. The Boy Scouts of America (about which more will be said below) states that these units and councils are all separate corporate entities. So, if someone were to ask “What impact the bankruptcy filing will have on my local scout troop?” the short answer, at least for right now, is “not much.” This answer could change over the coming months, however, and only addresses the legal aspect of the bankruptcy filing. It is certainly possible, however, that the general public's interest in scouting may decline due to the bankruptcy filing itself and the issues that caused it. Any such impact, however, would be a market effect, not a legal one.
If Local Units and Councils Did Not File for Bankruptcy, Then Who Did?
Two related entities actually filed for bankruptcy: the Boy Scouts of America, a non-profit organization, and Delaware BSA, LLC, a 501(c)(3) non-profit limited liability company which appears to be used to manage investments of the Boy Scouts of America and related organizations. This raises the question of what “business” the Boy Scouts of America is engaged in. The blunt answer is that the Boy Scouts of America is engaged in the business of selling memberships, goods, and services to local units and councils. The Disclosure Statement filed by the Boy Scouts of America highlights this point.
According to the Disclosure Statement, the Boy Scouts of America had total gross revenues of $394 million in 2019. Of that $394 million, approximately 30% came from supply sales, 16% came from membership fees, 15% were generated by operation of four “high adventure facilities” owned and operated by the debtor, 13% was attributable to investments, 8% to contributions, and 8% came from event fees.
If the Boy Scouts of America Generates So Much Revenue, Why Did They File Bankruptcy?
The answer, of course, is due to lawsuits alleging that minors were sexually abused while in boy scout programs. This is a potentially enormous liability for the Boy Scouts, which has become more critical over the past several years as many states have revised their statutes of limitations dealing with civil claims for victims of sexual abuse. This change has opened the door for many people whose claims would have been time-barred to now file suit for damages. The Boy Scouts of America has stated in its initial motions that approximately 275 civil lawsuits have been filed against the Boy Scouts (along with local councils as well), and that plaintiffs' attorneys have advised them that an additional 1,400 claims may be filed soon due to the aforementioned changes in statutes of limitations.
The potential impact of these lawsuits cannot be overstated. Given the large number of plaintiffs (which may increase in number as more states expand their statutes of limitation) and the possibility that successful claimants may be awarded punitive damages, the total recovery could potentially exceed the value of the debtors' assets.
How Does the Bankruptcy Filing Benefit the Boy Scouts of America?
The immediate benefit of the bankruptcy filing is to bring a halt to litigation in which the Boy Scouts of America is a defendant. Section 362 of the Bankruptcy Code imposes an automatic stay that halts any efforts to enforce or collect a debt from a debtor. This includes litigation, and the automatic stay requires all existing litigation to halt unless and until the bankruptcy court orders that any particular litigation can go forward. This does not stay litigation against non-debtors, however, so lawsuits against any local councils or scout troops will be unaffected (the debtors are seeking to extend the benefits of the automatic stay to those entities also, about which more will be said in a future post).
In the longer term, the bankruptcy filing gives the Boy Scouts of America the opportunity to propose a plan of reorganization that will enable the entity to pay off its debts, put a permanent end to the existing litigation, and emerge from bankruptcy as an operating business. Achieving this will not be as easy as it sounds. We will address some of the complicating factors in upcoming articles.