Case 18-09108-RLM-11 Doc 408 Filed 04/15/19 EOD 04/15/19 16:11:48 Pg 1 of 15 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION In re: Chapter 11 1 USA GYMNASTICS, Case No. 18-09108-RLM-11 Debtor. USA GYMNASTICS’ OBJECTION TO MOTION FOR DETERMINATION THAT AUTOMATIC STAY DOES NOT APPLY OR ALTERNATIVELY, FOR RELIEF FROM AUTOMATIC STAY WITHOUT 30-DAY WAIVER USA Gymnastics, as debtor and debtor in possession in the above-captioned chapter 11 case (the “Debtor” or “USAG”), hereby objects (the “Objection”) to the Motion For Determination That Automatic Stay Does Not Apply Or Alternatively, For Relief From Automatic Stay Without 30-Day Waiver [Dkt. 385] (the “Stay Relief Motion”), filed by Bela Karolyi, Martha Karolyi, and Karolyi Training Camps, LLC (collectively, the “Karolyi Parties”). In support of this Objection, USAG respectfully states as follows: INTRODUCTION Faced with hundreds of claims, co-defendants which were demanding indemnity and coverage under USAG’s insurance policies, mounting unpaid defense costs, and a tremendous burden on its limited staff, USAG filed a chapter 11 petition with the goal of giving USAG and the sexual abuse survivors the breathing room necessary to reach a negotiated settlement. In fact, some of USAG’s insurance carriers pushed for the bankruptcy filing as did some of USAG’s co- defendants. Currently, all of the key constituents in this case, including the Additional Tort 1 The last four digits of the Debtor’s federal tax identification number are 7871. The location of the Debtor’s principal office is 130 E. Washington Street, Suite 700, Indianapolis, Indiana 46204. Case 18-09108-RLM-11 Doc 408 Filed 04/15/19 EOD 04/15/19 16:11:48 Pg 2 of 15 Claimants Committee Of Sexual Abuse Survivors (the “Survivors Committee”) and counsel for sexual abuse survivors, are working towards a mediation process which USAG hopes will begin after the April 29, 2019 claims bar date sometime late this spring or early summer. For this mediation to succeed, the litigation involving co-defendants, like the Karolyi Parties, who assert indemnification claims and claims against USAG’s insurance be stayed until a resolution is reached. That the parties are taking this mediation process seriously is evidenced by the fact that all of the 548 sexual abuse survivors who have pending lawsuits against USAG and co-defendants have elected to enter into a voluntary stipulation with USAG enjoining the continued prosecution of their lawsuits against all co-defendants, including the Karolyi Parties, pursuant to 11 U.S.C. § 105 (the “Agreed 105 Stay Order”). (Dkts. 372, 403.) Only a handful of USAG’s 47 co-defendants have refused to agree to the 105 Stay Order.2 Because a complete stay is necessary, USAG sued those co-defendants, including the Karolyi Parties, who declined to enter into the Agreed 105 Stay Order. The Karolyi Parties’ response to USAG’s preliminary injunction motion is their Stay Relief Motion in which they urge this Court to allow a district court in California to rule on their pending motion to dismiss a plaintiff’s lawsuit on personal jurisdiction grounds. In support of their request for limited stay relief, the Karolyi Parties argue that allowing a California court to rule on their pending motion to dismiss will not implicate the stay or that, in the alternative, cause exists to lift the stay. Neither argument is correct. If the California court proceeds, USAG will be required to defend its interests in that litigation, will be exposed to additional indemnification demands, and will likely be forced to send employees to testify at an evidentiary hearing on the jurisdictional 2 These 47 co-defendants do not include Michigan State University, which has already settled with many of the plaintiffs, and Larry Nassar. 2 Case 18-09108-RLM-11 Doc 408 Filed 04/15/19 EOD 04/15/19 16:11:48 Pg 3 of 15 issues the Karolyi Parties raise in their motion to dismiss. This outcome will distract the Debtor’s personnel from their restructuring efforts and divert the Debtor’s limited resources, diminishing the Debtor’s estate and impeding the progress of this chapter 11 case. As a result, the automatic stay applies and the Debtor will suffer severe prejudice if it is lifted. In contrast, the Karolyi Parties will suffer no prejudice if the Court keeps the stay in place. Like every other similarly-situated litigant, the Karolyi Parties may elect to participate in the expected upcoming mediation and, if they choose not to settle, will only have to wait to litigate until this case is closed to defend themselves. Further, even if the Karolyi Parties were to prevail on their jurisdictional motion, the plaintiff in that case would likely file a new suit where jurisdiction lies, leading to additional burdens on the Debtor’s estate. Indeed, the Karolyi Parties implicitly invited the plaintiff to do just that. (See Stay Relief Motion ¶45). The Stay Relief Motion should therefore be denied. BACKGROUND I. The California Litigation Against The Karolyi Parties And The Karolyi Parties’ Lawsuit For Indemnification Against USAG. In October 2016, a Jane Doe plaintiff filed a complaint in California state court against USAG, the Karolyi Parties, and various other defendants for damages arising from alleged sexual abuse committed by Larry Nassar (the “California Litigation”). (Stay Relief Motion Ex. A.) Defendants removed the suit to federal court in July 2018. (Stay Relief Motion ¶ 8.) Thereafter, the Karolyi Parties filed a motion to dismiss for lack of personal jurisdiction. (Id.) The district court allowed jurisdictional discovery which was on-going at the time USAG filed for bankruptcy. (Id. ¶¶ 7, 11.) After Jane Doe and others sued the Karolyi Parties, the Karolyi Parties and two additional Karolyi-related entities, BMK Training Facilities, Ltd., and BMK Partners, Ltd., sued USAG and 3 Case 18-09108-RLM-11 Doc 408 Filed 04/15/19 EOD 04/15/19 16:11:48 Pg 4 of 15 the United States Olympic Committee in the 278th Judicial District Court of Walker County, Texas. (See Exhibit A hereto.) The Karolyi Parties alleged, among other things, that they were entitled to full and complete indemnification from USAG for any claims made against them related to Nassar or any investigations which arise out of Nassar’s conduct. (Id. at 22-24.) The Karolyi Parties also assert that they are named insureds under USAG’s insurance policies. (Id. at 22.) That case was still pending at the time USAG filed for bankruptcy. A few days before USAG filed for bankruptcy, on November 30, 2018, the district court in California held a hearing on the Karolyi Parties’ motion to dismiss for purposes of discussing how to address a disputed jurisdictional fact—whether Nassar was present at a 2007 meet held in California where the Karolyi Parties were also present. (Stay Relief Motion Ex. B at 5:12–17.) The Karolyi Parties claim that Nassar was not present and another co-defendant, Steve Penny, had submitted declarations from two USAG witnesses, Jeff Smith, a current employee, and John Hewett, who has retired, stating that Nassar was not present. (Id. at 5:21-25, 6:1-12, 16:14-16.) The district court concluded that the plaintiff would need to submit contrary testimony, either by deposition or at hearing, to address these declarations. (Id. at 14:18-24.) Counsel for the Karolyi Parties insisted that the district court hold an evidentiary hearing, rather than rely solely upon out-of-court statements, so that the district court could “judge [the] credibility of the witness.” (Id. at 15:14-16.) USAG’s counsel noted it would take some “planning on our part” to arrange for USAG witnesses to travel to California because the individuals live in Indiana. (Id. at 16:14-19.) In response, the district court stated that it was inclined to “require all the witnesses to be present.” (Id. at 17:4-5.) No hearing has been scheduled for that testimony. II. The Chapter 11 Case And Post-Petition Events. On December 5, 2018, USAG filed its chapter 11 petition, automatically staying the California Litigation against at a minimum USAG. On December 12, 2018, counsel representing 4 Case 18-09108-RLM-11 Doc 408 Filed 04/15/19 EOD 04/15/19 16:11:48 Pg 5 of 15 the plaintiff in the California Litigation and in other lawsuits against USAG wrote plaintiffs and defendants in the many pending lawsuits stating: “we believe that continuing discovery, challenging pleadings, and engaging in other litigation will infringe on the rights of USAG. ... Ultimately, our position is that if we proceed with the cases and attempt to excise USAG ourselves, without any rulings or directions from the courts, we are courting contempt citations from the Bankruptcy Court....” (See Exhibit B hereto). On January 24, 2019, the California district court entered an agreed order staying the California Litigation until March 15, 2019. That order provided that “[n]otwithstanding such stay, the court may issue a ruling” on the Karolyi Parties’ motion to dismiss “based on the existing record.” (See Exhibit C hereto). On March 14, 2019, the district court extended the stay until June 7, 2019. (See Exhibit D hereto.) This latest order is silent on whether the district court may rule on the Karolyi Parties’ jurisdictional motion and the district court has yet to rule on that motion. In the meantime, USAG, the Survivors Committee, and others began working towards a mediation. This Court established a bar date for filing claims. (Dkt. 230.) Key constituents have been discussing possible mediator candidates.