In the case of USA Gymnastics v. Liberty Insurance Underwriters, Inc., the Seventh Circuit reviewed an appeal concerning insurance coverage related to sexual abuse claims against Larry Nassar, associated with USA Gymnastics (USAG). Following the exposure of Nassar's abuse of numerous female athletes, USAG faced extensive litigation and investigations. USAG and its insurers, including Liberty, were involved in an adversarial proceeding regarding insurance coverage during USAG's Chapter 11 bankruptcy. A previous ruling affirmed that Liberty had a duty to defend USAG, leading to disputes over the reimbursement of attorneys’ fees. The bankruptcy court recommended that the district court award USAG almost all requested fees, which the district court subsequently approved, adopting most of the bankruptcy court’s findings. Liberty appealed, contesting the reasonableness of the fees. However, the courts established that USAG was entitled to a presumption that its incurred fees were reasonable and necessary, which Liberty failed to rebut. Consequently, the appellate court affirmed the lower courts' decisions, maintaining that USAG was entitled to the reimbursement of its legal expenses without any specific damage amounts being awarded at that time.
Liberty appealed a district court order mandating coverage for USAG against athlete lawsuits. In February 2022, it was determined that Liberty had a duty to defend USAG in almost all cases and that certain investigations qualified as formal proceedings under the insurance policy. However, further factfinding was required regarding whether the policy’s “Third Party EPL” sublimit affected coverage. After Liberty’s rehearing petition was denied and the mandate issued in April 2022, disputes over payment persisted. USAG claimed approximately $3.18 million in past defense costs, including $1.77 million for investigations and $205,000 in prejudgment interest, which Liberty disputed and sought to stay the defense order. USAG subsequently moved to enforce the order.
During a bench trial, USAG's Chief Legal Officer testified regarding the retention and oversight of six law firms, while expert witness Gene Schoon affirmed the reasonableness of USAG’s fees. Conversely, Liberty’s expert, Brand Cooper, contested the reasonableness of the invoices but acknowledged that he did not dispute certain amounts totaling about $1.43 million. Cooper later retracted his assertion, citing ongoing objections to the invoices without providing specific disputed figures. Following the trial, USAG sent a third demand letter to Liberty, referencing Cooper’s testimony about the reasonableness of fees, but Liberty countered that Cooper had not made a definitive assessment, asserting that his testimony did not bind them.
In September 2020, a bankruptcy court issued proposed findings, determining that USAG was entitled to a presumption that its incurred fees were reasonable and necessary, rejecting Liberty's arguments. The court found Schoon to be a credible expert witness and concluded that USAG had proven, by a preponderance of the evidence, that $1,944,354.26 of its fees were justified. The court recommended that the district court enter judgment for this amount, plus prejudgment interest. Liberty objected, but the district court overruled these objections and decided on a judgment of $1,889,278.26 after deducting $55,076.00 in non-recoverable legal research costs, also adding prejudgment interest. Liberty requested a final judgment under Federal Rule of Civil Procedure 54(b), which the court granted, setting the judgment for USAG at $2,171,951.18, plus prejudgment interest. Liberty appealed and sought a supersedeas bond to stay the judgment's execution, which was granted. Shortly before oral arguments, Liberty paid USAG $1,655,680.19 toward the judgment, with no recourse for recovery, rendering moot disputes regarding the reasonableness of the fees. The remaining issue concerns $458,472.26 of the judgment. The court will address the presumption of reasonableness of attorneys' fees when an insurer breaches its duty to defend, evaluate any special circumstances presented by Liberty, and review challenges to the trial courts' factual findings. The courts' assessment of attorneys’ fees is reviewed under an abuse of discretion standard, but legal framework issues are reviewed de novo. The precedent set in Taco Bell Corp. v. Continental Casualty Co. and adopted by the Indiana Court of Appeals in Thomson Inc. indicates that when an insurer breaches its duty to defend, the policyholder's incurred costs are presumed reasonable and necessary without detailed judicial review, as long as those costs are market-tested.
The case is under diversity jurisdiction, necessitating the application of state substantive law and federal procedural law. The determination hinges on how the state’s highest court would rule, with reliance on intermediate appellate court decisions when the highest court has not addressed the issue. The classification of rules as substantive or procedural can be ambiguous; in such instances, the court evaluates whether a federal rule conflicts with state law. The presumption at issue functions similarly to a burden of proof, influencing case outcomes when evidence is balanced, and is considered substantive law. Thus, the Taco Bell framework is utilized, unless modified by the Indiana Court of Appeals in Thomson.
Liberty contends that USAG should not benefit from the Thomson presumption due to inadequate supervision of outside counsel and unpaid fees. The court reviews legal questions de novo and assesses ultimate fee determinations for abuse of discretion, while factual findings are reviewed for clear error. Liberty argues that USAG did not sufficiently supervise outside counsel, citing a lack of requests for write-offs and minimal follow-up on invoices. USAG counters that neither Thomson nor the court mandates such actions for adequate supervision. The court finds no precedent supporting Liberty's position and holds that supervision does not necessitate withholding payment or detailed invoice scrutiny. Liberty's challenge on USAG's supervision is thus factual and subject to significant deference. Further analysis will occur in Section III.
Liberty contends that the Thomson presumption of reasonableness does not apply because USAG failed to pay approximately 30% of its incurred legal fees. USAG counters that Liberty is imposing conditions on the presumption that have not been established by any court and asserts that its payment of nearly 70% of the fees is sufficient to demonstrate their reasonableness. The analysis references the cases Taco Bell and Metavante, which the Indiana Court of Appeals adopted in Thomson, establishing that the presumption applies under conditions of reimbursement uncertainty and market incentives to economize. Notably, neither case stipulates that full payment of fees is necessary for the presumption to apply.
Clarification of the Taco Bell rule indicates that the presumption is applicable when a policyholder incurs legal fees without expecting insurer payment following the insurer's breach of the duty to defend. If a policyholder pays a significant percentage of its fees despite financial difficulties, this serves as strong evidence of market incentives to economize, supporting the presumption's applicability. USAG's nearly 70% payment of attorneys' fees is compelling evidence of this market test, bolstering the lower courts' conclusions regarding the reasonableness of the claimed fees.
Liberty further argues against the presumption's applicability by citing "special circumstances" without providing context, as mentioned in Metavante. It states that special circumstances may justify a district court's discretion in requiring additional information if market considerations are deemed insufficient. Liberty identifies three such circumstances, starting with the claim of a conflict of interest involving Schneider, USAG’s Chief Legal Officer, who was an attorney at Miller Johnson, one of USAG’s outside counsel firms. Liberty argues that this conflict compromises Schneider's ability to oversee Miller Johnson's billing disinterestedly, similar to concerns about oversight of other firms representing USAG.
Liberty's argument against applying the presumption of reasonableness in the context of a conflict of interest is rejected, as case law does not support such an exception. The insurer's objections to the policyholder's choice of defense counsel are weakened when it disclaims its duty to defend and is found to be incorrect legally. Liberty could have reserved its defense and assumed responsibility for USAG's legal representation, allowing it to select and oversee counsel and potentially seek reimbursement later. Instead, Liberty chose not to defend USAG and now raises concerns about a conflict of interest, which the law does not sanction.
Moreover, Liberty's assertion that USAG's review of legal bills constituted a conflict of interest is undermined by the fact that USAG's internal review, involving multiple executives, was adequate. USAG's CEO and CFO reviewed and approved the bills, reinforcing the bankruptcy court's finding that the Thomson presumption applied, as the reviews were thorough and involved multiple levels.
Liberty also claims the bankruptcy court erred in applying the presumption regarding fees from Gibson Dunn Crutcher LLP due to a special arrangement where the firm would seek reimbursement solely from USAG's insurers. While USAG lost the presumption for fees accrued after this agreement, the reasonableness of those fees remains supported by testimony indicating that $379,541 was reasonable and necessary. Liberty's subsequent payment to USAG in May 2022 included this reasonable amount, indicating that the primary dispute concerns only $73,556 of Gibson Dunn's fees.
The bankruptcy court evaluated testimonial and documentary evidence regarding the fees claimed by USAG for Gibson Dunn's services, ultimately determining that the total amount was both reasonable and necessary. Liberty faces a significant challenge in overturning this factual finding. A key aspect of Liberty's argument relates to grants USAG received from the National Gymnastics Foundation (NGF), totaling at least $7.73 million. Liberty contends that these grants diminished USAG's incentive to control costs, which is central to the Thomson presumption. However, USAG argued that most grant funds were allocated to other legal expenses and merely supported its operational viability without creating excess funds for legal costs. The bankruptcy court sided with USAG, stating that the grants did not negate the presumption due to USAG's financial instability.
Liberty has not provided evidence to dispute the fact that USAG used the grant money to manage its existing legal obligations, and the record does not indicate that USAG accumulated significant funds for legal expenses. Thus, the NGF grants do not invalidate the Thomson presumption. The burden of proof lies with Liberty to demonstrate that the requested attorneys’ fees were unreasonable or unnecessary when the presumption applies, and detailed reviews of invoices are not required. The court's findings on the reasonableness of the fees are based on factual determinations subject to a clear error review standard, which emphasizes deference to the trial court's capability to evaluate witness credibility and evidence. The bankruptcy court considered expert testimonies from both sides before concluding that the fees claimed by USAG for each law firm's work were justified.
Schoon and Cooper presented contrasting methodologies to assess the reasonableness of fees incurred by USAG, with both experts agreeing that Indiana Rule of Professional Conduct 1.5 provides the relevant standard. Schoon utilized a "total value" approach, considering various factors such as the complexity of legal work, while Cooper favored a "task-based" approach focusing on time and customary fees for each task. The bankruptcy court endorsed Schoon’s total-value approach as consistent with Indiana law, referencing a similar case, Thomson, which affirmed that a multi-factor analysis is mandated by Rule 1.5. The court determined Schoon’s methodology was appropriate, finding Cooper’s approach erroneous under Indiana law. Additionally, the court found Schoon to be more credible than Cooper, noting that Cooper's conclusions lacked empirical support. This credibility assessment is within the trial court's discretion and will not be disturbed unless clearly erroneous, which Liberty failed to demonstrate. Consequently, the focus on Schoon's total-value approach negated the need for detailed scrutiny of individual fees, although the court addressed Liberty's objections regarding the reasonableness of specific fees. For the firm Jenner, Block LLP, which represented USAG during its bankruptcy and in an investigation by the Indiana Attorney General, the bankruptcy court awarded $213,234.71 in fees, rejecting Liberty’s objections about excessive redactions and alleged unnecessary work related to clawback requests, affirming that the redactions were largely irrelevant to the amounts sought from Liberty.
The bankruptcy court recognized the complexity of USAG's Chapter 11 proceedings, involving extensive document reviews for clawback actions to protect privileged materials. It dismissed Liberty's claims that multiple firms conducting these reviews were unnecessary. Barnes, Thornburg LLP received full fees of $789,049.76, with Liberty objecting to $82,472.76 based on block billing and alleged duplicative work. The court deemed the firm’s efforts to understand the allegations against USAG reasonable under Indiana law, rejecting Liberty's objections.
Gibson, Dunn, Crutcher LLP was engaged to prepare USAG's CEO for Congressional testimony, with Liberty disputing $73,556.01 of their fees due to the participation of multiple lawyers. The court found the preparation necessary, supported by credible testimony regarding the complexities of such testimony.
Faegre Baker Daniels LLP, which served as national coordinating counsel for Nassar-related litigation, had fees of $48,199.50 disputed by Liberty due to a later conflict of interest. The court upheld the fees incurred prior to the conflict, highlighting that neither USAG nor Faegre could foresee the withdrawal at the time of work.
Miller Johnson, initially defending USAG in Michigan, later became its national coordinating counsel for Nassar-related matters, with Liberty contesting $35,362.29 of their fees as unnecessary. The court supported the necessity of Miller Johnson's role based on expert testimony, indicating that Liberty failed to demonstrate any clear error in the court’s findings regarding these fees.
Hilder, Associates, P.C. is a criminal defense firm that represented USAG in lawsuits filed by gym coaches and owners seeking to recover financial losses due to USAG's handling of Nassar's crimes. Liberty challenged $5,646.99 in fees, arguing that Hilder spent excessive time on a successful motion to compel arbitration. The bankruptcy court found Liberty's objection unpersuasive, referencing Schoon's testimony that winning the motion saved USAG significant resources, as a loss would have resulted in an unfavorable adjudication. Liberty failed to demonstrate any clear factual error. Consequently, both the bankruptcy and district courts determined that Liberty did not successfully rebut the presumption that the fees incurred were reasonable and necessary.
In addressing the fee dispute, the bankruptcy court applied the Thomson presumption despite Liberty's objections regarding USAG's supervision of outside counsel and fee payments. The court clarified that the specific type of supervision Liberty proposed is not necessary for this presumption, nor is full payment of all fees by the policyholder. The special circumstances cited by Liberty do not outright prevent the presumption's applicability. Ultimately, Liberty did not provide sufficient evidence to contest the presumption that the fees were reasonable and necessary. The judgment was affirmed. Moreover, USAG's request for sanctions against Liberty was not considered, as it was not filed as a separate motion, despite the potential for the court to award sanctions on its own accord.
