LANE ONE: USA Gymnastics bankruptcy case plan to be heard on Monday, but leading to a conclusion or to chaos?

(For our Highlights of the weekend’s major competitions, click here.)

Over more than three years since USA Gymnastics declared voluntary bankruptcy in the U.S. Bankruptcy Court for the Southern District of Indiana, its case – primarily concerned with the sexual abuse of former team physician Larry Nassar – appears to have finally headed toward a conclusion, to be considered in a two-day hearing beginning on Monday (13th).

But the outcome could be chaos.

After lengthy settlement talks, the main parties agreed on a re-organization plan for the federation, which includes the formation of a trust to pay hundreds of millions of dollars of insurance proceeds to the abuse survivors, and smaller amounts to a host of other creditors.

There are 10 different classes of claimants, but the main group is Class 6 – the abuse claims – and in the vote on the plan by that class, 505 ballots were distributed and after eliminating 29 invalid returns, the plan was accepted 476-0.

So, we’re all set, right? No.

After the months-long mediation process, nine of the 10 insurance companies with policies covering all of the various claims (from all classes) agreed to essentially fund a pool of money to pay the various claimants. Only one – TIG Insurance Company – did not agree, with policy claims against it of $106,201,818, or about 26% of the total claim amounts (it has 199 claims against it).

TIG Insurance, Liberty Insurance Underwriters, the State of Indiana and the U.S. Trustee all filed briefs in opposition to the plan on varying technical grounds and these will be dealt with on Monday. None appear strong enough to implode the plan, but there may be some technical changes made.

The USA Gymnastics lawyers filed an 88-page brief on Friday (10th) defending the plan, but also laying out the possible outcomes. And all-out chaos is one of the options; from the brief (legal citations omitted and the paragraphs expanded for readability):

● “As of the filing of this Confirmation Brief, the Survivors’ Committee has not yet elected the Partial Settlement Option. TIG Insurance Company (“TIG”), the lone hold-out Debtor CGL Insurer, also has not accepted the Survivors’ Committee’s settlement proposal or reached an alternative agreement with the Survivors’ Committee. The Debtor [USA Gymnastics], with the assistance of the mediators, has been working and will continue to work to assist the Survivors’ Committee, TIG, and the United States Olympic and Paralympic Committee (“USOPC”) in reaching a settlement.”

If, however, a settlement is not reached, the Plan before the Court will likely be the Litigation Only Alternative. This is not the result the Debtor wants, but if those speaking for survivors believe that a return to the civil courts is truly in their clients’ best interests, the Debtor believes that the time has come to respect that position.” (emphasis added)

● “Over 92% of the survivors participated in the voting process and all of those 476 survivors accepted the Plan and all three of its options. Of the 476 Abuse Claimants who voted for the Plan, 472 of them are represented by counsel. Given the strong voter turnout and the unanimous informed acceptance of the Plan, the time has come to provide Abuse Claimants with a path to resolve their claims.” (emphasis added)

In other words, while the re-organization plan can be declared effective, one of the options is the “Litigation Only” alternative, which would send all of the creditors in all of the classes – more than 625 – to file individual cases against all the USA Gymnastics, the USOPC and many others, with the insurers to eventually handle most of the claims (and with multiple cross-complaints coming between insurers as to their rights to defense and/or indemnification).

This is a process which will see many of the cases settled quickly for smaller amounts than might be available from a global settlement, but many of the abuse claims could go to dramatic, full jury trials and appeals which could take years to conclude. TIG’s enormous liability – over $106.2 million – has made it a hold-out; it appears to prefer to fight out the 199 cases against it one-by-one instead of contributing to the settlement fund and getting all of this over with.

For the Survivors’ Committee, a group of nine women who were abused who have been designated as the negotiating entity for the abuse claimants, the question will be whether it is better to accept the “Partial Settlement Alternative” which would distribute a lot of money to a majority of the abuse victims fairly quickly, or let everyone go their own way. The brief notes:

“Including the funds committed by the Twistars Settling Insurers, the total that has been raised to date is $294,484,311.00. Of this amount, $231,206,453 is being paid to buy back certain USAG insurance policies and $60,834,765 is being paid on behalf of USOPC by its insurance carriers, $2,125,000 is being paid on behalf of Twistars by its insurance carriers, and $318,093 is being paid on behalf of the Karolyis by their insurance carriers. The Debtor will continue working diligently through the Confirmation Hearing in an attempt to reach further settlement agreements so that the Plan may be confirmed under the Full or Partial Settlement Alternative.”

The USA Gymnastics filing last Friday (10th) stated for the first time that it is willing to let the Survivors’ Committee elect for litigation and begin a legal free-for-all, primarily (but not exclusively) in Michigan courts.

At the top of the list of questions for Monday’s hearing is whether TIG has agreed to join the settling insurers, and on what terms. If not, Friday’s filing explains just part of the confusion to follow:

“If the Plan is confirmed under the Litigation Only Alternative, the Debtor will receive a discharge but the Settling Insurers, Participating Parties, and other Protected Parties will not receive the benefit of the releases and injunctions proposed under the Full or Partial Settlement Alternative.”

The operations of USA Gymnastics itself would not be directly impacted by the Litigation Only Alternative, and would be able to continue as the National Governing Body for the sport. Its future, however, is hardly guaranteed as there is a currently-paused de-certification process begun against it by the USOPC, and it could also be de-certified by a Joint Resolution of the U.S. Congress under the Empowering Olympic, Paralympic and Amateur Athletes Act of 2020 (which would then constitute a violation of the Olympic Charter that could being sanctions against the USOPC from the International Olympic Committee.)

If TIG comes into the plan tomorrow, then the likely outcome is the “Full Settlement Alternative,” with the insurance money going to a to-be-formed Trust and the matter closed in 2022. If TIG stays out, the question is whether the Survivors’ Committee prefers a partial settlement and litigation only against TIG, or litigation, in which everyone is on their own.

Nearing five years after the Indianapolis Star brought Nassar’s abuse to public attention in March of 2016 and three years in court, that’s what at stake before U.S. Bankruptcy Judge Robin L. Moberly on Monday and Tuesday.

The beginning of the end, or the end of a long beginning?

Rich Perelman

You can receive our exclusive TSX Report by e-mail by clicking here. You can also refer a friend by clicking here, and can donate here to keep this site going.

For our 743-event International Sports Calendar for 2021 and beyond, by date and by sport, click here!