Besieged by approximately 100 lawsuits brought by more than 350 sexual assault victims of its former physician, serial child molester Larry Nassar, USA Gymnastics has filed a petition to be declared bankrupt under chapter 11 of the federal bankruptcy code. The petition, drafted by attorneys at Jenner & Block and filed in the U.S. Bankruptcy Court for the Southern District of Indiana, is intended to reorganize USAG and “adjust its debts” so that USAG can continue normal business operations. Chief Judge Robyn Moberly, who previously served as president of the Indiana Judges Association, will preside over the litigation.
The bankruptcy process will effectively place Nassar victims’ lawsuits, as well as other claims brought by actual and potential USAG creditors, on pause. This is significant for a number of reasons. Most important, the pretrial discovery process—whereby witnesses are required to declare under oath their knowledge of Nassar’s interactions with young women and also turn over any relevant emails, texts, social media messages, videos, audio recordings, hand-written notes and other correspondences—will not occur for an indefinite period of time, should it ever occur. Indeed, under bankruptcy law, creditor actions against a so-called “chapter 11 debtor” are automatically stayed (postponed) upon the filing of the bankruptcy petition. They typically remain stayed for the duration of the bankruptcy process. While child custody, domestic violence and certain other types of legal actions are statutorily exempt from this general rule and remain in effect even after the filing of a bankruptcy petition, the types of legal claims brought by survivors of Nassar do not clearly fall within any of those statutory exemptions.
For the survivors, USAG’s legal strategy is no doubt frustrating—at least in the short term. Survivors include former gymnast Rachael Denhollander, McKayla Maroney, Aly Raisman and hundreds of other former gymnasts who have publicly shared their horrible memories of Nassar. In official capacities for USAG and Michigan State, Nassar sexually assaulted them and hundreds of other women. He did so while grotesquely assuring his “patients” that he was merely providing them medical care in order to treat their injuries. These crimes took place over a period of three decades, in training rooms and medical offices, all the while Nassar publicly portrayed himself as an esteemed member of the medical community and was generally regarded as such.
It’s a far different story now for Nassar. The 55-year-old former Michigan State Professor has been convicted of numerous crimes and sentenced to between 140 and 360 years in federal and state prisons. This is tantamount to a life sentence and provides at least a modicum of justice to his victims.
But Nassar’s victims see blame as extending far beyond the disgraced physician. They regard the institutions who entrusted him to care for teenagers as facilitating a monstrous figure. Survivors have thus argued that USAG and Michigan State are institutionally liable. These institutions are accused of failing to learn of Nassar’s crimes and failing to take basic steps to stop and prevent subsequent occurrences of those crimes. Stated more bluntly, the survivors depict USAG and Michigan State as unconscionably indifferent to the health and well-being of young persons and as abhorrently inept in failing to confront the truth. In addition, a group of husbands of the former gymnasts have filed institutional liability claims. They argue for loss of consortium, which entails a spouse’s injury interfering with marital companionship and sexual relations and thus harming the non-injured spouse.
The fate of these lawsuits, and their ability to compel a multimillion-dollar settlement, now rest in the hands of the often complex and sometimes unpredictable world of federal bankruptcy law.
The U.S. Olympic Committee is also an interested party and impacted by USAG’s bankruptcy
Under bankruptcy law, the automatic stay extends to administrative proceedings and repossessions of property. This aspect of the stay presents a potentially serious complication for the U.S. Olympic Committee. Last month, the USOC declared an intention to strip USAG of its status as gymnastics’ national governing body. To that end, USOC CEO Sarah Hirshland announced that USAG was in violation of USOC bylaws and that, pursuant to Section 8 of those bylaws, a complaint was issued to revoke USAG’s governing authority. The complaint process does not lead to automatic revocation and could take a number of months to play out. The process will involve a hearing before an “independent” three-person panel, a report, a recommendation and a vote by the USOC.
USAG will likely argue that this process is administrative in nature and concerns attempted repossession of a form of property. To that end, USAG will stress that the licensing entity (USOC) is engaged in an administrative process by applying internal procedures in an attempt to remove a license from a sanctioned entity.
In response, expect USOC to insist that the word “administrative,” as used in bankruptcy law, refers to an administrative agency affiliated with the government, not a private entity applying its own rules. Along those lines, while the USOC’s name sounds like it is part of the government, it is, like USAG, a 501(c)(3) not-for-profit entity and not government funded. On the other hand, the USOC was created through federal legislation—the Ted Stevens Olympic and Amateur Sports Act—and is accorded certain powers through that act. This point could help USAG before Judge Moberly.
The USOC is also poised to argue that “property” under bankruptcy law entails conventional forms of property, rather than a formal granting of authority to govern a sport.
USAG’s perilous situation as it hopes bankruptcy provides a life raft
In a court filing reviewed by SI, USAG estimates that the potential impact of Nassar victims’ lawsuits is between $75 million and $150 million. In striking contrast, the not-for-profit’s primary assets are only $6.5 million (along with unspecified proceeds of insurance policies). In other words, USAG could owe victims of Nassar in the ballpark of 10 or 20 times what USAG is worth. Unless USAG’s insurance providers are contractually obligated to pay those victims, those victims could ultimately obtain a hollow legal victory: being awarded millions of dollars in damages and yet never being able to collect because USAG goes out of business. USAG argues that the chapter 11 filing will keep it operating and increase its chances of paying at least some of the money it will ultimately owe.
To that end, USAG contends that bankruptcy will bring about “orderly, equitable, and efficient procedures to allocate UAGA’s available insurance proceeds to survivors who hold allowed claims against USAG.” Further, USAG maintains that changes brought on by a chapter 11 reorganization will help it “regain the trust and confidence of the USOC and athletes in USAG as the national governing body for the sport of gymnastics.” To begin the bankruptcy process, USAG had to pay a $1,167 filing fee and a $500 administrative fee. Obviously, $1,667 fees and accompanying legal bills pale in comparison to what USAG could ultimately owe Nassar’s survivors.
A chapter 11 bankruptcy should be distinguished from a chapter 7 bankruptcy. If USAG had invoked chapter 7, its comparatively modest assets would be sold off to pay only a small portion of the considerably larger amount of money owed to creditors. Those creditors include some of USAG’s business partners, such as Fidelity Investments and PNC Bank. Under chapter 7, USAG would cease operations and most of USAG’s debts would be extinguished through an automatic stay (a halting of further legal proceedings). In contrast, a chapter 11 filing enables USAG to continue to operate and remain solvent. USAG, its creditors and the bankruptcy court will soon develop a plan where USAG will pay creditors in a particular order.
Regardless of how USAG’s bankruptcy plays out, it’s unlikely that USAG will be able to pay tens of millions of dollars to Nassar’s victims. USAG’s insurance coverage, which USAG claims would provide “significant coverage for the amounts asserted in the various lawsuits,” would help on that front, but USAG concedes that such coverage is “insufficient” to the potentially massive amount owed. A possible silver lining for Nassar victims is that chapter 11 gives USAG an opportunity to remain in business and, conceivably, rebuild itself into an entity with more resources that could be used to pay victims. At least in theory, then, the amount of money ultimately paid to survivors could increase through the bankruptcy process.
However, this seems more “theory” than “reality.” USAG continues to experience significant turmoil and appears vulnerable to closure within the next several years. In October, interim president Mary Bono abruptly resignedafter being sharply criticized—including by four-time Olympic champion Simone Biles—for a controversial tweet related to Nike’s announcement that Colin Kaepernick will be the primary face of the company’s 30th anniversary “Just Do It” campaign. USAG currently does not have a president, though its bankruptcy filing claims it has hired a professional recruiting firm and that USAG expects to have the position filled “by early 2019.” Also, as detailed above, the USOC has begun plans to strip USAG of its status as gymnastics’ national governing body. Should these plans continue through the bankruptcy process, and should USAG lose its governing power, it’s unclear why or how USAG would continue to sustain operations.
Understanding the bankruptcy process and the eventual ranking of creditors
Nassar’s survivors will have little choice but to be patient with USAG’s bankruptcy, but that doesn’t mean they’ll need to watch idly from the sidelines. Just the opposite, they can play a very active role. With that in mind, chapter 11 is a multi-step, multi-party process that involves the bankrupt entity, its creditors, the judge and the U.S. Trustee Program, which is an arm of the Justice Department. The Trustee Program enforces federal bankruptcy laws and ensures that creditors comply with those plans by paying amounts owed in a timely basis.
Through its filing, USAG has informed Judge Moberly of its assets, debts, income, expenses and other components of its financial affairs. The filing will lead to a court-ordered automatic stay which, as explained above, halts efforts brought by all or some of USAG’s creditors to collect. It will be up to Judge Moberly to determine whether any of the creditors can continue to pursue collection. It is possible that all of the creditors’ legal actions are stayed until the completion of the bankruptcy process or until they reach an out-of-court settlement with USAG.
Going forward, USAG will be required to file monthly operating reports to Judge Moberly. The creditors will be able to review those reports. Also in the coming weeks, USAG officials will also be obligated to meet with court and government officials and adhere to set procedures. Thereafter, USAG officials will meet with creditors and interested parties (almost certainly including Nassar survivors and/or their attorneys) in a public hearing. This meeting normally occurs a month or two after the filing of the case. During this hearing, both survivors and their attorneys will have the opportunity to express their concerns about USAG possibly using the bankruptcy process to delay being held accountable. They will also be able to question USAG officials and/or their attorneys about the need for bankruptcy protection and their goals in reorganization.
After she evaluates this information, Judge Moberly will work with the parties on developing a plan of reorganization. This plan will balance USAG’s efforts to continue operations while also addressing creditor claims. Those creditors will be classified in terms of priority of being paid. Usually the first group paid are those involved in the administration of the bankruptcy, such as the debtor’s attorneys who litigate the bankruptcy. Next up are normally the “secured creditors.” These are businesses and persons whose claims against USAG are secured by assets, such as a mortgage lender. In most cases, unsecured creditors are third in priority. They have a claim for money from the debtor (USAG) without having a claim to any of the debtor’s assets as collateral. USAG identifies numerous unsecured creditors and lists the 30 with the largest claims. That group includes a former employee with a claim to severance, a law firm with a claim to legal fees and a bank with a claim to a credit card statement. Plaintiffs in the Nassar survivor litigation are potential creditors (“potential” since they haven’t yet won their cases or reached settlements) with unsecured claims.
Judge Moberly will have discretion in determining who is paid first, how much each creditor is paid, and whether and how much money needs to be held in reserve to pay potential creditors. To be sure, she will consider the arguments of Nassar survivors. Those survivors will rightfully stress that by filing for bankruptcy before the completion of the survivor lawsuits and by suspending those litigations before USAG is found to owe survivors money, USAG has ensured that the survivors are frozen out of the prioritization process. At the same time, Judge Moberly will not ignore the legitimate interests of existing creditors. They include employees and independent contractors who USAG may owe compensation, and vendors who haven’t yet been paid for services rendered.
If USAG continues to operate, a settlement with Nassar survivors is the likely outcome
Bankruptcy will not guarantee that USAG survives. Judge Moberly will review the relevant materials, assess the soundness of USAG’s financial assumptions and scrutinize USAG’s leadership. If she is convinced that USAG could turn itself around, she’ll make determinations that aim to keep USAG in operation. But Judge Moberly will need to be persuaded that USAG can withstand financial distress and conduct itself in ways that ultimately benefit its creditors. If such a process fails, USAG could file to be forced to liquidate. Given USAG’s assets, it seems unlikely that liquidation would offer creditors much of what they are owed—perhaps only pennies on the dollar.
It’s possible that USAG and plaintiffs in the Nassar lawsuits could reach an out-of-court settlement. They could take stock in the experience of clergy abuse survivors in their litigations against religious entities that are, like USAG, in the chapter 11 bankruptcy. For example, in September, U.S. Bankruptcy Judge Robert Kressel approved a $210 million settlement between the Archdiocese of St. Paul and Minneapolis and more than 400 survivors.
A settlement for USAG would provide it financial certainty and also help it begin the process of legally accepting responsibility for wrongdoing. Unfortunately for USAG, it likely has nowhere near the assets of an archdiocese. While USAG’s insurance companies would play a key role in any settlement, it’s unclear the extent to which it would be obligated to provide financial coverage in a settlement.
SI will keep you updated on USAG’s bankruptcy process.
Michael McCann is SI’s legal analyst. He is also Associate Dean of the University of New Hampshire School of Law and editor and co-author of The Oxford Handbook of American Sports Law and Court Justice: The Inside Story of My Battle Against the NCAA.