How bankruptcy can help USA Gymnastics and the Boy Scouts compensate more survivors

USA Gymnastics and the Boy Scouts of America sex abuse scandals have rocked communities nationwide. Revelations regarding decades of the sexual abuse of children and long-running institutional failures to stop it are raising questions about the future of both nonprofits.

USA Gymnastics, the sport’s governing body, employed the now-imprisoned serial abuser Larry Nassar as its team physician. It has filed for bankruptcy. The Boy Scouts of America, which since 2008 has faced at least 200 federal lawsuits, many alleging the cover-up of sexually inappropriate conduct beginning as long as half a century ago, is weighing whether to follow suit.

Survivors are suing USA Gymnastics and the Boy Scouts based on the alleged abuse, raising concerns over what will become of local gyms and troops.

I’m a legal scholar who has studied the bankruptcy cases filed by hundreds of nonprofits, including religious ones like Catholic dioceses. Based on what I’ve observed, I anticipate that this step has the potential to allow these organizations to continue operating and to establish ways to pay sexual abuse survivors going forward.

Larry Nassar’s victims reacted with relief and sorrow when the former USA Gymnastics doctor was sentenced by Judge Rosemarie Aquilina to 40 to 175 years in prison. AP Photo/Carlos Osorio

Bankruptcy 101

The situations that USA Gymnastics and the Boy Scouts find themselves in are atypical for bankruptcy cases.

Generally, bankruptcy automatically halts civil lawsuits pending against the filing organization and prevents subsequent lawsuits based on conduct that occurred before the organization’s bankruptcy case. This pause lets troubled organizations continue operating.

In Chapter 11 bankruptcy, also called reorganization, the debtor gets time to work with its creditors and other parties – and a chance to get their operations in order. In these two instances, that would include sexual abuse survivors and the organizations’ liability insurance carriers.

Businesses that file bankruptcy often find themselves in trouble because of financial missteps, poor management or changes in the business environment. For example, retail bankruptcies, such as the filings of Sears, Nine West and Mattress Firm, are rising because of drastic changes in how Americans shop.

The same factors hold true for most of the approximately 125 nonprofits that file for Chapter 11 every year, as I established through my in-depth study of the bankruptcy filings of churches and other religious nonprofits.

Insurers are key

However, the waves of sex abuse allegations waged against USA Gymnastics and the Boy Scouts do closely resemble the numerous Catholic diocese bankruptcy cases filed in places where clergy stand accused of sexually abusing children.

Since 2004, almost 20 dioceses – the ecclesiastical districts under a bishop’s jurisdiction – have filed for Chapter 11 bankruptcy with the stated purpose of dealing with numerous sexual abuse accusations.

The Catholic diocese reorganizations so far have led to settlements totaling about US$1 billion. In most cases, insurers have agreed to foot more than half of the bill.

Archbishop John C. Wester announced the Archdiocese of Santa Fe, New Mexico’s plans to file for Chapter 11 bankruptcy protection in November 2018. AP Photo/Susan Montoya

Making deals

Likewise, the ability of USA Gymnastics and the Boy Scouts to reorganize successfully will hinge on whether they can reach deals with their insurers.

When the USA Gymnastics scandal broke, questions about the extent to which insurers would cover payments to alleged victims soon arose. USA Gymnastics said it filed bankruptcy because its insurance claims did not cover the money it owed Nassar’s victims. It also stated that the overwhelming majority of its assets are proceeds from its prebankruptcy insurance policies, which it claims cover the survivors’ claims.

Since it filed, USA Gymnastics has sought a judgment from the bankruptcy court about the degree to which the 12 insurance companies it lists in its petition must cover survivors’ claims.