Boy Scouts' Bankruptcy Is a Troubling Use of Chapter 11 Law

(Bloomberg Opinion) -- Maybe you’ve heard: Boy Scouts of America is filing for bankruptcy to put an end to the sexual abuse lawsuits it is facing. On one level, it’s business as usual. From makers of IUDs in the 1980s to opioid manufacturers today, it’s become standard for corporations liable for harm on a large scale to take advantage of the protection of bankruptcy. The victims get some compensation while the organization gets legal clarity and finality.

Yet on closer examination, there’s something strange, even troubling about using laws designed to resolve business meltdowns to address the social ills caused by nonprofit entities that are meant to do good, yet in fact impose egregious harm.

Bankruptcy law is all about cold, hard business calculations. But the lawsuits against the Scouts, like the sexual abuse lawsuits against the Catholic Church and Gymnastics USA, are about our collective assignment of moral blame, and about what can be done for victims who can never be made whole by mere monetary compensation. No doubt the victims deserve money, and lots of it. But it’s far from clear that the Scouts deserve the legal fresh start that bankruptcy is supposed to give them.

Recall the basic justification for Chapter 11 bankruptcy. Unlike Chapter 7 bankruptcy, which essentially puts an end to a bankrupt corporation and liquidates its assets, Chapter 11 is meant to save a corporation. We recognize that the firm’s creditors won’t get paid back everything they are owed. But we make the economic judgment that a negotiated settlement of the creditors’ claims will at least get them something — in principle, more than they’d get if the organization simply ceased to exist.

Put another way, the essence of Chapter 11 bankruptcy is accepting some quantitative injustice — creditors don’t get paid back 100 cents on the dollar — in exchange for reducing the extent of that injustice.

As applied to for-profit corporations that have caused what are sometimes called mass torts — injuring many people through a common cause or pattern of behavior — Chapter 11 still makes a kind of economic sense. The U.S. tort system assigns a monetary value to the injuries that people have suffered. Those who’ve been injured then effectively become creditors of the company. Because the company doesn’t have enough money to pay both the victims and its other creditors, we allow it to reorganize.

Along the way, as a mechanism necessary to make the system work, we impose on tort victims some of the same limits that bankruptcy imposes on other kinds of creditors. They have to file their claims by a certain date and agree to a system for determining what they will get.

True, tort victims will often have been harmed in ways that money cannot fully address. But we generally deal with that problem simply by acknowledging the limits of the tort system and moving on. After all, the more money the reorganized company makes, the better it will be able to pay off both victims and other creditors. Moral blame hardly enters into the equation.

When it comes to nonprofits organized to provide public goods, like scouting or religion or gymnastics, this model makes much less sense. These aren’t organizations whose future operations will make profits that would go to compensate victims. And the court judgments against them are intended not only to compensate victims, but to express society’s horror and outrage that publicly oriented, well-meaning organizations became vehicles for the terrible harm of sexual predation.

It therefore seems morally questionable for the Boy Scouts and their like to be able to claim the benefits of Chapter 11 and make a clean break with the organization’s wrongdoing. Getting the Boy Scouts up and running again won’t necessarily fix the sexual abuse problems that have plagued the organization in the past. At a minimum, before letting the Boy Scouts reorganize, society should require the Scouts to implement fundamental reforms that would make sexual abuse much less likely in the future. At the maximum, it might be worth asking whether the organization is so fundamentally broken that it should be disbanded and re-founded from scratch.

The only really plausible argument in favor of allowing morally broken nonprofits to use Chapter 11 is that, in preventing the organization from going totally broke, it makes it possible for victims to get paid. Ongoing lawsuits might leave nothing behind in the Boy Scouts’ coffers; hence, the arbitrary deadline by which the victims must file.

While for-profit corporations need such deadlines in order to reassure stockholders and get back to profitability, no there’s no perfect parallel for nonprofits. One way to resolve the problem in this case might be to require some funds to be set aside on a rolling basis, to be paid to any late-filing victims.

Above all, the problem with the Boy Scouts’ reorganization is the symbolic suggestion that the time has come for everyone to move on. Sexual abuse is a distinct form of moral wrong, especially when it occurs under the auspices of nonprofits that are supposed to take care of young people and make the world a better place. We shouldn’t just get past it. And we should think long and hard about allowing the economic pragmatism of Chapter 11 to send the message that we should.

To contact the author of this story: Noah Feldman at nfeldman7@bloomberg.net

To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Noah Feldman is a Bloomberg Opinion columnist and host of the podcast “Deep Background.” He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”

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