Bankruptcy Update Blog

In the News: USA Gymnastics Files Bankruptcy Due to Fallout over Sex-Abuse Scandal

A sex-abuse scandal has landed another organization in bankruptcy court.  USA Gymnastics (“USAG”) filed chapter 11 last week in Indiana following a team doctor’s conviction for abusing hundreds of girls.[i] 

The background has been widely reported.  Larry Nassar was a Michigan State University (“MSU”) employee who served as a volunteer doctor to USAG.  Allegations of abuse surfaced in 2015.  Nassar was convicted in 2017 and sentenced to 40 to 175 years in prison.

Victims sued MSU and others in Michigan, California, and elsewhere.  Mediation of those claims produced a $500 million settlement.  More than 350 individuals have also filed claims against USAG, and the organization is a defendant in over 100 lawsuits.  In November, the U.S. Olympic Committee (“USOC”) started a proceeding to revoke USAG’s designation as the governing body of U.S. gymnastics.

USAG filed bankruptcy to “implement orderly, equitable and efficient procedures to allocate USAG’s various insurance proceeds to survivors who hold claims against USAG.”[ii]   USAG also hopes to “regain the trust and confidence of the USOC and athletes in USAG as the national governing body of the sport of gymnastics.”[iii] 

USAG has no secured debt and little unsecured debt.  The largest threat to its financial viability is the contingent liabilities stemming from the pending lawsuits against it.  The bankruptcy filing estimates that the financial exposure could range from $75 million to $150 million.  But some observers say that might be too low.  USAG’s main assets are about $6.5 million in cash and insurance proceeds. 

A sexual abuse and molestation liability insurance policy provides $2 million for acts of sexual abuse and molestation.  The bankruptcy filing included a motion to permit USAG to keep paying premiums, deductibles, broker fees, and other financing obligations on this and other policies in the ordinary course.  But the filing notes that the insurance “might be insufficient” to cover the onslaught of claims against USAG.  The bankruptcy filing also puts a hold on the multiple lawsuits pending against USAG.[iv]  Bankruptcy Judge Robyn L. Moberly will decide where and when the claims will be adjudicated.

USAG is a 501(c)(3) not-for-profit corporation.  After the scandal broke, USAG’s President resigned and its entire Board of Directors was replaced.  The former President, Steve Penny, was later arrested on charges of tampering with evidence.  A search firm is helping USAG find a new President/CEO. 

USAG is involved in woman’s gymnastics, men’s gymnastics, trampoline and tumbling, rhythmic gymnastics, acrobatic gymnastics, acrobatic gymnastics, and group gymnastics.  It has 200,000 athletes, professionals and clubs as members.  A separately formed foundation and non-debtor, The National Gymnastics Foundation, Inc., provides educational grants and offers other activities. 

USAG also selects and trains the U.S. gymnastics teams for the Olympics and World Championships.  But that role is in jeopardy.  And the organization has lost sponsors and its revenue has decreased. 

In addition, a 10-month investigation commissioned by the USOC concluded that many individuals and institutions enabled the abuse that took place.  The 233-page report issued this week pinned blame on the USOC, MSU, and others.  The report prompted Senator Richard Blumenthal of Connecticut to ask the F.B.I. to investigate the USOC and USAG’s “role in this massive cover-up.”   

 

[i] The bankruptcy case is pending in the U.S. Bankruptcy Court for the Southern District of Indiana, Case No. 18-09108.

[ii] Declaration of James Scott Shollenbarger, dated December 5, 2018, at ¶24.

[iii] Id.

[iv] However, lawsuits against individual officers and directors of USAG are not automatically stayed absent a further order of the Bankruptcy Court.  Likewise, third-party discovery of USAG in connection with lawsuits against other defendants is also not subject to the automatic stay and can proceed absent a further order of the Bankruptcy Court.