It is no doubt a difficult time for everyone amid this world pandemic. Many stresses are placed upon many individuals and businesses in the United States and throughout the world. Stresses of the on-going virus and and halt to life is also placing stresses in the sports world. Sports leagues throughout the world and the United States are on hold. This is no different for one of USA’s fastest growing sports and a sport that is popular worldwide outside the United States – Rugby. Akin to FIFA, World Rugby Limited runs rugby worldwide and consists of members. Just like the FA runs England’s soccer, USA Rugby runs the sport of rugby in the United States and is a member of World Rugby Limited, a full sport member of the United States Olympic and Paralympic Committee.
USA Rugby suspended all activities for a 30-day period starting on March 13, but then announced activities are suspended indefinitely. As a result of this catalyst, USA Rugby stated, “The current suspension of sanctioned rugby activities caused by the ongoing COVID-19 pandemic has accelerated the existing financial challenges facing the Union, and a reorganization process will now be progressed with input from World Rugby.” The freeze was the last straw which broke the camel’s back. USA Rugby will go through a “reorganization” process, is a nice way of saying they are filing for bankruptcy. USA Rugby has filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
USA Rugby’s financial woes began in 2018 after USA Rugby hosted the World Cup’s 7’s Championship in San Francisco where cost overruns and revenue shortages forced USA Rugby to negotiate for an unsecured loan from World Rugby. At the same time, USA Rugby was facing a $40,000,000 breach of contract case brought by United World Sports. The suit is currently in arbitration. The suit has thus far cost $480,000 and now USA Rugby has to pay counsel their retainer of $100,000, which purportedly they cannot afford. Many revenue short-fallings and over-expenditures have increased their liabilities. Prior to the filing and on the verge of insolvency, USA Rugby discussed bailout money contributions from World Rugby in the amount of $1,000,000 in order to continue operations. At the same time, USA Rugby laid off workers and froze credit lines in order to create some financial stability. The belief was that the money would keep them operational until May of 2020, when USA Rugby was going to seek capital from World Rugby Expo. With the Covid pandemic, this plan was not carried out. In total, USA Rugby has approximately $6,000,000 in liabilities against assets of approximately $1,100,000. About $468,000 of the liabilities are secured by JPMorgan Chase Bank and the rest are not.
What does it mean when one files for Chapter 11 Bankruptcy? Chapter 11 of the Bankruptcy Code provides a procedure which allows a debtor to continue operating its business while it either formulates a plan of reorganization with its creditors or liquidates its affairs. A Chapter 11 plan of reorganization is a comprehensive and detailed agreement between a debtor and all of its creditors and stockholders that provides for, among other things, 1) discharge of prepetition claims against the debtor, giving the debtor a “fresh start.”; and 2) treatment of all pre-petition and post-petition debt and equity claims against the debtor. Treatment of all pre-petition and post-petition debt and equity claims against the debtor may include: distribution of property to pre-petition creditors and stockholders; conversion and/or cancellation of debt; and dilution or cancellation of equity interests. Chapter 7 Bankruptcy differs from Chapter 11 in that Chapter 7 is akin to liquidation of assets to pay off creditors and thus makes it much more difficult to continue the ordinary course of business. In most cases. the business ceases operations. One major benefit of Chapter 11 is the protection from creditors and suspension of pending litigation due to a power called automatic stay. “The automatic stay is triggered immediately on the filing of the bankruptcy petition. It automatically stops almost all acts and proceedings against the debtor, including virtually all creditor collection activities. The automatic stay gives the debtor a breathing spell so that it can address its business problems and reorganize its affairs without interference and pressure from creditors.” Obviously, this is important as USA Rugby is in arbitration for settlement of the case against it and can settle many of its liability issues.
Along with its petition for voluntary Chapter 11, USA Rugby also filed a Debtor’s motion for entry of an order (i) authorizing the debtor to (a) continue insurance coverage entered into pre-petition and satisfy pre-petition obligations related thereto, and (b) renew, amend, supplement, extend, or purchase insurance policies in the ordinary course of business. USA Rugby has 11 different insurance policies in place ranging from Commercial Excess Liability to Workers Compensation. USA Rugby procures insurance that its members rely on to conduct rugby events. This insurance is critical to USA Rugby having the ability to carry out its ordinary course of business during the Chapter 11 proceedings. In the petition, USA Rugby argues that having the ability to continue the insurance policies and enter into new insurance policies is essential to preserving the value of the Debtor’s business and operations. The proceeding may take months, during which time sports may again start. Not having liability insurance, especially in a full contact sport such as rugby where the risk of injury to players and fans is high, will certainly stop the sport of rugby being played and possibly further hinder USA Rugby.
It is tragic to see sports in this type of position. It is to be hoped that we never see another sport organization in this type of situation, and that USA Rugby can come out of bankruptcy in a better position than it was in before.