Sexual Abuse and Bankruptcy: How Organizations Abuse Chapter 11 to Avoid Victims' Demands for Answers

• Jurisdiction: United States,Federal
• Publication year: 2020
• Citation: Vol. 37 No. 1

Sexual Abuse and Bankruptcy: How Organizations Abuse Chapter 11 to Avoid Victims' Demands for Answers

Juan Martinez

SEXUAL ABUSE AND BANKRUPTCY: HOW ORGANIZATIONS ABUSE CHAPTER 11 TO AVOID VICTIMS' DEMANDS FOR ANSWERS

Abstract

USA Gymnastics has been embroiled in highly contested bankruptcy proceedings since December 5, 2018, and the organization has been unable to confirm a reorganization plan. Prior to filing for bankruptcy, these victims filed over 100 suits against USA Gymnastics claiming that the organization failed to properly investigate claims of abuse and placed the gymnasts in an unsafe environment. Now, the victims claim USA Gymnastics is unwilling to negotiate a settlement agreement in good faith.

The bankruptcy filing activated the automatic stay, putting the victims' litigation on hold. The automatic stay is a powerful tool that is necessary to ensure the bankruptcy court's success. However, in situations involving organizations accused of sexual abuse, the automatic stay prevents victims from delving into the organization's role in their abuse.

Bankruptcy courts are courts of equity, but they are bound by statute in their ability to remedy a wrong. Organizations like USA Gymnastics abuse the Bankruptcy Code to gain unintended benefits at the expense of abuse victims. They place victims in a difficult position; if the survivors receive compensation through bankruptcy, they lose their chance to conduct discovery proceedings otherwise available through litigation. This outcome prevents the victims from receiving answers regarding their own abuse and from guaranteeing that the abuse will not continue in the future. Further, the discovery process may uncover other sources of damages like USA Gymnastics' officers or the U.S. Olympic and Paralympic Committee, but the victims are forced to wait until the organization is out of bankruptcy to pursue litigation. This lengthy delay could prevent victims from timely discovering evidence vital to successfully litigating their claims. Due to the statute of limitations and failure to timely uncover evidence, the delay may also prevent victims from bringing suit against any nondebtor that could be liable for their injuries.

The bankruptcy process is currently inadequate to properly protect the interests of sexual abuse victims. Bankruptcy focuses on financial issues, so victims of sexual abuse will have non-financial interests negatively impacted by the bankruptcy process. This Comment argues that bankruptcy courts should borrow from other areas of law and provide special protections for victims of

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sexual abuse. This protection would prioritize the victims' claims and ensure that the victims can pursue an investigation into the organization's involvement in their abuse. This plan would allow adequate protection for sexual abuse victims and deter misuse of the bankruptcy courts by organizations.

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Introduction

On January 24, 2018, USA Gymnastics team physician Larry Nassar was found guilty of multiple sex crimes committed against gymnasts under the guise of medical treatment over several decades.¹ Nassar committed these crimes as a gymnast physician at USA Gymnastics and as a doctor at Michigan State University.² More than 350 girls and young women accused Nassar of abusing them.³

USA Gymnastics filed for bankruptcy⁴ ("USA Gymnastics case"; "USA Gymnastics") after a wave of lawsuits by gymnasts who claimed that the organization failed to adequately protect them from Nassar.⁵ In the two years following the commencement of the bankruptcy case, the victims have been trapped in a tangled web of disputes involving USA Gymnastics, its insurers, and the United States Olympic and Paralympic Committee ("USOPC").⁶ This long and fruitless process has led victims to seek dismissal of USA Gymnastics' bankruptcy petition on the grounds that the organization has not been negotiating in good faith.⁷ The gymnasts argue that USA Gymnastics and the U.S. Olympic Committee strung both the court and the survivors along in hopes of buying enough time to enjoy the financial windfalls they expected from the upcoming Summer Olympics in Tokyo, Japan, then scheduled for 2020.⁸ If successful in

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dismissing the bankruptcy petition, the victims may resume their lawsuits. However, given the time they spent trapped in bankruptcy, the victims might have a difficult time in discovery because evidence and witnesses may not be as readily accessible as they were two years ago. This Comment will argue that the current bankruptcy system is ill-equipped to protect the interests of victims of sexual abuse and that public policy warrants special bankruptcy protection for this unique class.

The Nassar criminal trials were an emotional ordeal for the survivors and their families; the victims read statements detailing how Nassar's abuse changed their lives.⁹ The overwhelming nature of the trial was best exemplified when a father of three victims attempted to attack Nassar in open court.¹⁰ On December 7, 2017 in the first of three separate trials, U.S. District Judge Janet Neff sentenced Nassar to twenty years, for three counts of receiving child pornography, possessing child pornography, and destroying and concealing evidence.¹¹ On January 24, 2018, Nassar received a 40 to 175 year sentence in Ingham County, Michigan after pleading guilty to seven counts of criminal sexual conduct.¹² Additionally, Nassar received a sentence for 40 to 125 years in prison for crimes committed in Eaton County, Michigan.¹³

Over the course of 2018, USA Gymnastics found itself the target of multiple lawsuits filed by Nassar's victims.¹⁴ These suits argued that USA Gymnastics failed to protect gymnasts from Nassar's abuse despite being informed of Nassar's actions for years.¹⁵ As the allegations against Nassar began to mount,

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USA Gymnastics lost sponsorships because sponsors chose to let their contracts expire instead of renewing them with the organization.¹⁶ The sponsors have not closed the door on USA Gymnastics completely, with some leaving open the possibility of reassessing the organization's sponsorship potential for the 2020 Summer Olympics.¹⁷

In November 2018, the USOPC began proceedings to strip USA Gymnastics of its National Governing Body ("NGB") status.¹⁸ NGBs are organizations that govern and manage all aspects of their respective sport within the United States.¹⁹ NGBs are responsible for training, competition, and development for their sport, as well as nominating athletes to the USOPC teams.²⁰ As an NGB, USA Gymnastics receives funding from the USOPC to support teams representing the United States at international events, including the Olympics.²¹

On December 5, 2018, USA Gymnastics filed for chapter 11 bankruptcy, automatically staying the lawsuits filed by Nassar's victims.²² Initially, the USOPC stated that the bankruptcy's automatic stay would not affect its plan to decertify USA Gymnastics,²³ but the USOPC has since decided not to proceeded with decertification, choosing instead to give USA Gymnastics time to reach a settlement with Nassar's victims.²⁴ Unfortunately, USA Gymnastics' bankruptcy is not the first of its kind. Several organizations have filed for bankruptcy following lawsuits claiming that they failed to protect plaintiffs from abuse.

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For example, over the last decade, the Boy Scouts of America organization has experienced backlash similar to that faced by USA Gymnastics, as allegations of sexual abuse reaching as far back as 1946 have come to light.²⁵ These allegations resulted in several states retroactively modifying their statutes of limitations to allow survivors of sexual abuse a year-long window to file claims against Boy Scouts of America.²⁶ The rise in lawsuits against the organization, coupled with its tarnished reputation, has led Boy Scouts of America to file for bankruptcy.²⁷ Other similar cases include the bankruptcies of the Catholic Church and, more recently, the Weinstein Company.²⁸ The Weinstein Company bankruptcy is eerily similar to the USA Gymnastic bankruptcy in several respects. First, both bankruptcies arose from mass lawsuits by victims of sexual abuse that occurred at each organization over the span of several decades.²⁹ Second, both bankruptcies were filed in 2018, and the debtors are still in the process of negotiating a chapter 11 plan.

Although there are, sadly, quite a few examples of this growing trend of bankruptcies arising out of discovery of long-standing sexual abuse, this Comment will primarily focus on USA Gymnastics as the test case. USA Gymnastics exemplifies the problems presented in bankruptcy cases involving sexual abuse by employees of the debtor organization. While the Weinstein bankruptcy is similar, several differences make USA Gymnastics a better test case. The Weinstein Company bankruptcy differs from USA Gymnastics in the nature of abuse and level of corruption. In the Weinstein Company case, the abuse was committed by Harvey Weinstein, the company's president and founder, whereas the abuse in USA Gymnastics was committed by Larry Nassar and other doctors and coaches. Because this Comment focuses on how bankruptcy limits the victims' ability to investigate the organization's role in their abuse and the necessary protections that should be implemented, the USA Gymnastics case presents a better starting point for discussion. In the Weinstein

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case, the corruption and involvement of the Weinstein Company in the sexual abuse is well-explored and detailed. The involvement or negligence of USA Gymnastics is not as clear and allows for a discussion on the associated issues.

By filing for bankruptcy, the debtor organization forces survivors to play by the rules of bankruptcy. Bankruptcy provides the best forum to deal with the financial issues, but USA Gymnastics also reaps unintended benefits through the Code. The survivors' chances for conducting discovery and locating other sources of...