Judge sues insurers for alleged bad faith in Boys Scouts sex abuse cases
More than 90 insurance companies are accused of breach of contract and bad faith in the suit.
A breach-of-contract and bad-faith lawsuit was filed Tuesday in the U.S. Northern District of Texas against more than 90 insurance companies who oppose the Boy Scouts of America’s (BSA) $2.4 billion bankruptcy settlement.
Retired Judge Barbara J. Houser, trustee of the BSA Settlement Trust and former chief bankruptcy judge in the Northern District, filed the complaint and is seeking a declaratory judgment.
The settlement is meant to address more than 82,000 sexual abuse claims from former scouts who allege they were assaulted as children.
Insurers push back
Jeffrey M. Tillotson of Tillotson Johnson & Patton in Dallas prepared the complaint for Houser. The trustee’s legal team also includes attorneys with the Washington, D.C.-based Gilbert firm.
The reorganization plan that created the settlement trust was approved earlier this year in the Bankruptcy Court for the District of Delaware in spite of strong opposition from a host of insurance companies.
Delaware’s federal district court heard the insurers’ appeal but agreed in March with the bankruptcy court that it had “related to” jurisdiction over the third-party claims being released.
The opposing insurance companies sought relief from the U.S. Court of Appeals for the Third Circuit, but in April the appeals court denied a request by the plan’s opponents to issue a stay while they appeal the federal court’s approval of the plan. That appeal remains pending.
Houser now seeks to enforce the various insurance policies in Texas, where the BSA has its headquarters.
Houser’s complaint states in part, “These defendants argued that the plan impermissibly impaired their rights to assert coverage defenses following confirmation of the plan. The defendants who opposed the plan further asserted that they had no obligation to cover abuse claims because of the terms of their insurance policies, the manner in which abuse claims will be evaluated and potentially paid by the trust, or both, among other defenses.”
Both the Delaware bankruptcy court and the district court rejected defendants’ arguments that the plan unlawfully impaired their rights, the complaint said.
Houser emphasizes that not all insurance companies have opposed the plan.
“Despite these defendants’ refusal to acknowledge their coverage obligations under the insurance policies, BSA and (BSA) Local Councils were able to reach agreement with some of their insurers prior to confirmation of the plan. Twenty-nine of BSA’s and Local Councils’ insurers paid more than $1.6 billion to resolve their liabilities for abuse claims,” the complaint states.
In addition to the request for a declaratory judgment on breach of contract and bad faith causes of action, Houser gives notice of the trustees’ intent to do some house cleaning. When litigation first appeared in courts, prior to BSA’s filing of the Chapter 11 bankruptcy petition, two insurance companies had active cases in Illinois and Texas.
In 2017, National Surety Corp. filed suit against BSA and a Local Council in a Chicago circuit court, National Surety Corp. v. Boy Scouts of America, seeking declaratory relief regarding its obligations to provide covered for abuse claims asserted by 18 plaintiffs, the complaint said.
In 2018, BSA filed a complaint against National Surety, Allianz, and the Settling Insurance Companies in Dallas County.
“No rulings on the merits were made in either action before the actions were automatically stayed by the filing of BSA’s bankruptcy petition on February 18, 2020,” the trustee complaint said.
Given the piecemeal nature and limited scope of the Illinois and Texas actions as compared to the comprehensive relief sought in the complaint, the trustee gives notice it has moved, “contemporaneously with the filing of this complaint, to dismiss both” the Illinois and Texas suits, the complaint states.
The defendant insurance companies include many of the largest companies in the industry. Named defendants include Allstate Insurance Co., Fireman’s Fund Insurance Co., Liberty Mutual Insurance Co., Nationwide Mutual Insurance Co., and The Travelers Companies Inc.
The defendants have yet to respond, however, the settlement plan has been criticized by legal analysts on a number of grounds.
Last month, George Mason University Foundation law professor Todd Zywicki wrote, “These insurers are required to provide coverage without confirmation of their rights to require the Boy Scouts of America to assist them to investigate and defend against claims to ensure their validity, including raising the statute of limitations as a defense. Indeed, so extreme is the plan, these insurers aren’t entitled to even the most basic information to determine the validity of an individual’s claim.”
Zywicki also noted the bankruptcy court overruled objections from the U.S. Department of Justice bankruptcy trustee and some abuse survivors to the release from future claims of some 100,000 third parties in exchange for contributing to the victims’ compensation fund.
By granting this broad relief to non-debtor parties, the case conflicts with the ruling of the U.S. Court of Appeals for the Second Circuit in the Purdue Pharma opioid case that decided the bankruptcy courts lack this power, Zywicki said.
Vinson & Elkins said this demonstrates a lack of uniformity across the circuits on the issue of whether bankruptcy courts have statutory and constitutional authority to approve third-party releases.
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