USA Gymnastics v. Liberty Ins. Underwriters, Inc.

46 F.4th 571

USA GYMNASTICS, Plaintiff-Appellee,

v.LIBERTY INSURANCE UNDERWRITERS, INC., Defendant-Appellant.

No. 21-2914

United States Court of Appeals, Seventh Circuit.

Argued May 17, 2022

Decided August 16, 2022

George M. Plews, Gregory Michael Gotwald, Christopher E. Kozak, Attorneys, Plews, Shadley, Racher & Braun LLP, Indianapolis, IN, for Plaintiff-Appellee.

Ronald Paltin Schiller, John B. Hill, Bonnie M. Hoffman, Attorneys, Hangley Aronchick Segal Pudlin & Schiller, Philadelphia, PA, for Defendant-Appellant.

Before Sykes, Chief Judge, and Hamilton and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Larry Nassar, who was affiliated with nonprofit USA Gymnastics, Inc. ("USAG"), sexually assaulted hundreds of female athletes. After Nassar's conduct came to light, USAG faced many lawsuits and multiple investigations. USAG and its insurers, including Liberty Insurance Underwriters, Inc., litigated questions about insurance coverage in an adversary proceeding before a bankruptcy court. In a previous appeal, among other rulings, we affirmed the decision that Liberty had a duty to defend USAG.

There were also ancillary disputes over the amount of attorneys' fees that Liberty owed USAG. While the first appeal remained pending, USAG sought to enforce the order entitling it to reimbursement. Liberty resisted, asserting that large portions of the fees USAG claimed were not reasonable and necessary. After a bench trial, the bankruptcy court recommended that the district court award USAG nearly all the requested fees. The district court agreed, so it adopted most of the bankruptcy court's findings and conclusions and entered judgment for USAG. Liberty appeals.

The bankruptcy and district courts correctly concluded that USAG was entitled to a presumption that the fees it incurred were reasonable and necessary. Liberty must therefore rebut the presumption by showing that various portions of the fees did not meet that standard. Because Liberty fails to do so, we affirm.

I

Our opinion resolving the previous appeal recounts the underlying facts in detail. USA Gymnastics v. Liberty Ins. Underwriters, Inc. , 27 F.4th 499, 508 (7th Cir. 2022). In short, Nassar used his position with USAG to sexually assault hundreds of women and girls over several decades. Because of that abuse, USAG has faced hundreds of lawsuits by former athletes, as well as several investigations by federal and state entities, including Congress, the Indiana Attorney General, and the United States Olympic & Paralympic Committee ("USOPC"). Id. at 509.

USAG sued several insurers in Indiana state court, arguing the companies were required to defend it and pay legal expenses related to the lawsuits and investigations. Id. One of those insurers was Liberty, from which USAG had purchased a claims-made directors and officers liability insurance policy. The insurers removed the case to the United States District Court for the Southern District of Indiana under diversity jurisdiction. USAG filed for bankruptcy under Chapter 11, and the insurance-coverage litigation between USAG and Liberty took place in an adversary proceeding as part of that bankruptcy. Id. The district court retained jurisdiction.

Faced with cross-motions for summary judgment, the bankruptcy court concluded that Liberty's policy covered the "athlete lawsuits" and various investigations. Id. at 509–10. Liberty filed objections to the bankruptcy court's findings and conclusions, but the district court overruled those objections. In January 2020, the district court ordered Liberty to "provide a complete defense" to USAG with respect to several matters, including the athlete lawsuits and several investigations. The district court also ordered Liberty to reimburse USAG for its defense costs, but the court did not award damages in any specific amount. Liberty appealed the district court's order.

In February 2022, we held that Liberty had a duty to defend USAG against nearly all the athlete lawsuits. See id. at 525, 528, 530–31. We also ruled that the Congressional, USOPC, and state-level investigations were "formal proceedings" or "formal investigations" for which coverage exists under the insurance policy. Id. at 531–33. We remanded, though, for further factfinding on the question of whether the policy's "Third Party EPL" sublimit restricted the scope of coverage. Id. at 533–34. Liberty's petition for rehearing was denied, and our mandate in that appeal issued in April 2022.

While the first appeal was pending, the parties continued to dispute and litigate issues concerning payment. Shortly after the district court ordered Liberty to provide coverage and reimburse USAG for its defense costs, USAG sent Liberty a calculation of damages. USAG sought about $3.18 million in past defense costs, including $1.77 million for investigations and $205,000 in prejudgment interest on past defense costs. Liberty did not agree to USAG's demand and sought to stay the district court's defense order. In turn, USAG moved to enforce the order. After the district court denied Liberty's motion to stay, USAG sent Liberty another letter, demanding that the insurer identify the specific amounts of attorneys' fees that it disputed. Consistent with the defense order, USAG also insisted that Liberty "enclose a check payable to USAG for the entire amount [Liberty] agrees is reasonable and necessary on the Covered Matters." Liberty declined.

The bankruptcy court held a bench trial on USAG's motion to enforce the defense order. Stipulated exhibits and deposition testimony were entered into the record. USAG's Chief Legal Officer, C.J. Schneider, testified about his role within the organization and his efforts to retain and oversee the efforts of six law firms, which performed various types of legal work for USAG. In addition, USAG offered the expert testimony of attorney Gene Schoon, who had prior experience serving as a national coordinating counsel during his days as a practicing lawyer. He testified that in his opinion, all the fees USAG sought were reasonable and necessary.

On the other hand, Liberty presented the expert testimony of attorney Brand Cooper. Cooper testified that because of several issues with the invoices submitted by the retained law firms, he could not conclude that the attorneys' fees USAG sought were reasonable and necessary. When the court asked whether he had an opinion on what the bottom-line number of reasonable and necessary fees for one of the law firms should have been, Cooper responded he had "no problem with the billings that they provided, with the exceptions that [he] noted." Later, the court requested "a joint statement about identifying costs that are not disputed." The court noted the fees that both sides agreed were reasonable and necessary appeared to be "the lion's share" of those that USAG claimed.

At that point, Cooper testified that he determined certain fee amounts incurred by USAG—which totaled about $1.43 million—were reasonable and necessary. Yet almost immediately, Cooper contradicted his prior testimony. On redirect-and recross-examination, Cooper stated his general objections to the law firms' invoices prevented him from determining that any amounts were reasonable and necessary. Then, in answer to the court's questions, Cooper expanded on the nature of his objections but refused to give concrete figures that were not disputed.

Shortly after the bench trial concluded, USAG sent Liberty a third demand letter. USAG noted that Cooper's testimony suggested large portions of the fees were reasonable and necessary. In its written response, Liberty claimed that Cooper "could not make any final assessment of the amount of reasonable and necessary defense costs," and Liberty further asserted that his testimony did not bind it.

In September 2020, the bankruptcy court entered proposed findings and conclusions. The court rejected Liberty's arguments and concluded that under applicable case law, USAG was entitled to a presumption that the fees incurred were reasonable and necessary. The court also found Schoon "to be the more credible and reliable expert witness." According to the bankruptcy court, USAG had proved by a preponderance of the evidence that $1,944,354.26 of the fees it incurred were reasonable and necessary. So, the court recommended that the district court enter judgment in that amount, plus prejudgment interest. Liberty filed objections to the bankruptcy court's proposed findings and conclusions.

The district court overruled those objections and declared its intent to enter judgment for USAG in the amount of $1,889,278.26 ($1,944,354.26 minus $55,076.00 in legal research costs that the district court concluded were not recoverable), plus prejudgment interest. Liberty requested that the court enter final judgment under Federal Rule of Civil Procedure 54(b) on the part of USAG's case seeking reimbursement of past attorneys' fees. The court agreed and entered final judgment for USAG in the amount of $2,171,951.18, plus prejudgment interest. Liberty appealed from that judgment. Simultaneously, Liberty moved to approve a supersedeas bond and stay execution on the judgment. The court granted the motion and stayed execution on the judgment pending our mandate in this appeal.

Long after briefing concluded, and just days before oral argument, the parties notified this court that Liberty had paid USAG $1,655,680.19 toward the judgment. According to the parties, Liberty is without recourse to seek return of that payment. As the parties agree, that renders moot any remaining dispute about the amounts that Cooper testified were reasonable and necessary, as we cannot grant "any effectual relief" in that respect. See Germeraad v. Powers , 826 F.3d 962, 967 (7th Cir. 2016) (citations omitted). The live controversy before us concerns the remaining $458,472.26 of the judgment.

II

We first address the parties' arguments about a presumption, under which the attorneys' fees that a policyholder claims after an...