The bankruptcy court rejects ch. 11 Petition | Patterson Belknap Webb and Tyler LLP
United States Bankruptcy Judge Harlin Hale recently fired the National Rifle Association Chapter 11 petition because it was not filed in good faith. The decision leaves the 150-year-old gun rights organization vulnerable to the New York attorney general’s lawsuit to disband it.
In August 2020, New York Attorney General Letitia James (the “NYAG”) filed a complaint seeking to dissolve the National Rifle Association (the “NRA”), a nonprofit organization organized in New York City. The NYAG accused the NRA and its senior executives of diverting millions of dollars from its charitable mission for personal use, of awarding contracts for the benefit of close associates and family, and of “appearing to hand out contracts. lucrative no-shows to former employees in order to buy their silence and continued loyalty. The NYAG alleged that four people in particular spent huge sums of NRA money on, for example, trips to the Bahamas, private jets, expensive meals and other trips.
On January 7, 2021, the NRA filed for Chapter 11 bankruptcy in the North District of Texas (the “Petition”). See In re: Nat’l Rifle Ass’n of Am. & Sea Girt LLC, debtors., No. 21-30085 (HDH), 2021 WL 1970738, at * 4 (Bankr. ND Tex. May 11, 2021) (“In re NRA”). A former salesperson for the NRA, NYAG, and others quickly decided to dismiss the petition pursuant to 11 USC § 1112 (b) (1). Subject to certain exceptions, subsection 1112 (b) (1) allows an interested party to request the dismissal of a Chapter 11 application “for cause”. A non-exclusive list of ’cause[s]Is provided, but “the term” cause “provides flexibility to bankruptcy courts and may include a finding that the debtor’s claim for relief is not in good faith. ” In re NRA at 7 O’clock.
After an expedited discovery and a brief trial, the court rejected the reasons given by the NRA for filing the petition and concluded that it was not filed in good faith. The NRA claimed it had filed the petition for, among others, centralize and streamline litigation and litigation with creditors and reappear as a Texas-based nonprofit. The NYAG and others countered that the petition was aimed at evading regulatory oversight, an impermissible use of bankruptcy proceedings. Identifier. at * 7-8. In cross-examination, NRA Executive Vice President Wayne LaPierre said the NRA filed the petition “because the [NYAG] calls for the dissolution of the NRA and [seizure of] its strengths, and we believe that it is not a level playing field. “Mr. LaPierre also asserted that” the solvency and all [the NRA’s] other dispute. . . are not problems that would require [the NRA] be bankrupt. Further, Mr. LaPierre asserted the accuracy of one of the NRA’s public communications about the petition, which stated in a question and answer section that “[t]its action is justified mainly by one thing: the disorderly and political attack on the NRA by the [NYAG]. Based on this and other testimony, the court concluded that “the primary purpose of filing for bankruptcy was to avoid possible dissolution as part of the NYAG enforcement action.” Identifier. at * 11-13.
After identifying the main objective of the petition, the court considered whether this motivation “was a valid reason for bankruptcy such that the bankruptcy was filed in good faith”. The court concluded that was not the case, finding that the NRA’s goal of filing for bankruptcy was less like a traditional bankruptcy case in which a debtor faces financial hardship or a judgment than it does. can not and no longer satisfy cases in which the courts have held bankruptcy was filed to gain an unfair advantage in litigation or to avoid a regulatory scheme. While the petition may not have been filed to “immediately end the execution action of the NYAG,  it was depriving the NYAG of the remedy of dissolution, which is a distinct advantage in litigation. Further, according to Justice Hale, using the bankruptcy process to avoid dissolution “deprives New York State of the ability to regulate nonprofit corporations in accordance with its laws.” Identifier. to * 13-15.
Thus, the court concluded that “on the basis of all the circumstances,  the NRA’s bankruptcy petition was not filed in good faith, but was instead filed for the purpose of gaining an unfair litigation advantage. . . and as an effort to avoid a regulatory system. Neither was “a target or sanctioned by the Bankruptcy Code.” Accordingly, the court saw fit to dismiss the case. Identifier. at * 16-19.
While Hale J.’s analysis was fact-specific, the case demonstrates that review tribunals may apply when considering the merits of Chapter 11 motions. Hale J. noted that “sometimes slightly different reasons, ”the NRA provided for filing the petition, suggesting that the inconsistencies raised suspicion. Identifier. at 7 O’clock.