LANE ONE: USA Gymnastics to USOC: “We’re not dead yet”

Did USA Gymnastics tip the scales of justice in its favor with a bankruptcy filing?

You have to give credit to the USA Gymnastics Board of Directors. They aren’t giving up and they are not about to roll over for the convenience of the United States Olympic Committee.

That stance may or may not matter in the end, but Wednesday’s unexpected announcement that USA Gymnastics had filed for protection under Chapter 11 of the U.S. Bankruptcy Code changes the rules of battle considerably.

Said newly-installed USA Gymnastics Board chair Kathryn Carson in a statement, “We are moving forward with our plans to strengthen our organization to further support the work of our members and gymnasts. We have made significant progress in implementing safety initiatives and are in the process of searching for a new CEO who has the experience to build a leadership team that will restore confidence in USA Gymnastics, and set and execute a clear vision for a successful future.

“USA Gymnastics will continue with its day-to-day operations of directing and managing the sport’s business and implementing initiatives that put the safety and well-being of the athletes at the forefront.”

The impact of a Chapter 11 filing is significant:

∙ First, the action was taken in the Federal court for the Southern District of Indiana, which now has jurisdiction of the case and will be the arbiter during the bankruptcy process.

∙ Second, as a voluntary filing, it allows USA Gymnastics to continue business-as-usual during the reorganization process. This differs from a Chapter 7 filing, which is for liquidation of the entity and is usually quite involuntary.

∙ Third, it essentially stops the litigation process cold. The statue, at 11 United States Code §362 (a) provides a stay (or freeze) of

“(1) the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor … or to recover a claim against the debtor …

“(6) any act to collect, assess, or recover a claim against the debtor … “

This applies to all of the suits filed against USA Gymnastics by abused gymnasts.

∙ Fourth, it sets control of the distribution of USA Gymnastics’ insurance proceeds in the hands of the Bankruptcy Court judge. This is eventually going to be important and USA Gymnastics noted this in its announcement:

“Apart from these insurance proceeds, USA Gymnastics has no other significant assets that could be used to pay claims. USA Gymnastics believes that the Bankruptcy Court is the best forum in which to implement appropriate procedures to equitably determine and allocate the insurance proceeds among claimants, allowing compensation to survivors to proceed more quickly than litigation filed in multiple courts around the country.”

This is one aspect of this filing that the USOC should like as well, as it will also not be the one to determine who gets what from the insurance funds available to USA Gymnastics.

It also stops the legal circus. The resolution of who-gets-how-much is out the hands of juries, and in the hands of the court. Lawyers for the gymnast-plaintiffs won’t like this, and it could result in a change in tone in settlement talks. Former USA Gymnastics chief executive Kerry Perry had expressed some optimism in her Congressional testimony about the mediation process which had already been started with the survivors.

∙ Fifth, it gives USA Gymnastics time to breathe. This was also noted explicitly in the USA Gymnastics statement:

“[T]he Chapter 11 filing also allows USA Gymnastics to work with the United States Olympic Committee to determine the best path forward for the sport of gymnastics. ‘We look forward to future conversations with the USOC to demonstrate our commitment at all levels to strengthening the organization and making gymnastics the best it can be for athletes at all levels,’ said Carson.”

While the USOC is working through its own process for de-certification of USA Gymnastics, it also knows that it is also a defendant – and a much deeper pocket – in almost all of the suits filed against the gymnastics organization. It would be the best outcome for everyone if the suits against both the USOC and USAG were settled at the same time.

This was a bold and well thought out move by USA Gymnastics, even if it does not eventually survive. By moving the issue of how the fallout from the Larry Nassar scandal out of courtrooms across the country and into a single filing with the U.S. Bankruptcy Court, USAG can say – correctly – that if anyone has something to say, they can say it to the judge (or just as likely, a Special Master appointed by the court). USA Gymnastics has now put itself back in the gymnastics business.

Unexpected? Yes. Smart? Very. And it sends a message not to underestimate USAG’s will to live.

Rich Perelman