North Texas District Bankruptcy Court Dismisses NRA Bankruptcy Cases | Kramer Levin Naftalis & Frankel LLP

The bottom line

The North Texas District Bankruptcy Court in In re National Rifle Association of America and Sea Girt LLC, Case No. 21-30085 (Bankr. ND Tex. 11 May 2021), ECF No. 740, dismissed the bankruptcy cases of the National Rifle Association on the grounds that the filing was “not for a intended or sanctioned purpose by the Bankruptcy Code ”. The court determined that the bankruptcy claims were filed for the purpose of obtaining an unfair legal advantage in a lawsuit brought by the New York Attorney General and therefore had not been filed. sincerity.

What happened?

Context of the case

In mid-2017, at least two members of the Board of Directors of the National Rifle Association of America (NRA), including Wayne LaPierre (LaPierre), were told that the New York Attorney General (NYAG) was opening investigations into the NRA. Fast forward to August 2020, when the NYAG filed a lawsuit in New York State Court (NYAG Complaint) starting the “NYAG Enforcement Action” naming four defendants: (1) LaPierre, (2) John Frazer (Frazer), the general counsel of the NRA, (3) the former treasurer and chief financial officer of the NRA, and (4) the former chief of staff of the NRA. The NYAG complaint made a number of allegations of impropriety by LaPierre, including (i) exploiting the NRA for its financial advantage and for the benefit of a close circle of board staff and salespeople of the NRA, (ii) intimidation, punishment and expulsion of anyone at a high level who has raised concerns about their conduct, and (iii) hiring and retaining at senior positions of people who would allow LaPierre to control the organization. The other defendants were also charged with various forms of irregularities. The NYAG complaint sought (i) the dissolution of the NRA, (ii) the return of certain funds paid to current and former officers, (iii) the ban for certain former officers, including LaPierre and Frazer, from serving as trustees of any New York charity. , and (iv) avoidance of certain transactions. Notably, some of the allegations in the NYAG complaint were also addressed in a “whistleblower memo” presented to the NRA audit committee in mid-2018. By the time the NYAG complaint was filed or shortly thereafter, the NRA already had actions pending against the NYAG and was facing a lawsuit by the District of Columbia attorney general against the NRA and the NRA Foundation.

On January 7, 2021, the board of directors passed a resolution approving an employment contract for LaPierre, which, unbeknownst to the remaining board of directors, allowed him to unilaterally authorize a bankruptcy application. About a week later, on January 15, 2021, the NRA and Sea Girt LLC filed for bankruptcy under the direction of LaPierre. Prior to the bankruptcy filings, the board had no discussions about bankruptcy, Chapter 11, or a possible reorganization. The only people in the NRA (other than LaPierre) who knew about the potential bankruptcy filings were three members of the new Special Litigation Committee and the NRA spokesperson.

In the first few weeks of the bankruptcy filings, Ackerman McQueen, Inc. (a former salesman and opponent of the NRA litigation), the NYAG, and the District of Columbia filed motions to dismiss the Chapter 11 cases or, as subsidiary, appoint a Chapter 11 Administrator.

Bankruptcy court ruling

Following a 12-day trial with 23 witnesses, the court determined that the NRA’s bankruptcy cases should be dismissed and that the appointment of a trustee or examiner would not be in the best interest of the creditors and the estate at the present time.

Section 1112 (b) (4) contains a non-exclusive list of what constitutes a “cause” for termination, although the Fifth Circuit Court of Appeals has determined that bankruptcy courts have some leeway. to determine the “cause” of the dismissal, which may include a finding that the debtor filing for bankruptcy is not in good faith. To determine the primary objective of the NRA for filing for bankruptcy, the court assessed the various reasons given by the NRA: (i) the cost of pending litigation, (ii) the need for respite and the possibility of centralize litigation, (iii) come out of bankruptcy as a Texas-based business, (iv) the desire to “modernize” the organization and (v) reduce operating expenses, process enforceable contracts heavy and unexpired leases and streamline a claims process through a confirmed reorganization plan. However, the court ruled that these reasons seemed unlikely given that there was a consensus among witnesses that the NRA was in its best financial position for years when it filed for bankruptcy. In fact, LaPierre testified that even if the bankruptcy cases were dismissed, the NRA could pay all of its creditors and meet its obligations. The court determined that the NRA’s desire to reinstate in Texas appeared to be a way to achieve its primary goal – to avoid disbandment as a result of the NYAG enforcement action.

Once the court determined that the primary reason for the NRA filing for bankruptcy was to avoid dissolution, the court assessed “all of the circumstances” to determine whether avoiding dissolution was a valid objective in filing a claim for bankruptcy. filing for bankruptcy and whether the bankruptcy has been properly filed. Faith. The court distinguished the situation of the NRA from that of a “traditional” bankruptcy case, in which the debtor faces a monetary judgment that he cannot satisfy and the regulator can use the reconciliation process to recover. Instead, here the NRA was using the Chapter 11 process to undermine recourse under state law and effectively deprive New York State of the ability to regulate nonprofit corporations. The court determined, based on all of the circumstances, that the NRA’s bankruptcy application was filed for the purpose of obtaining an unfair litigation advantage in the NYAG enforcement action and to avoid a regulatory regime. As a result, the court concluded that the bankruptcy cases were not filed in good faith and should be dismissed.

The court briefly addressed its decision to deny the appointment of a trustee or examiner, noting that it appeared that the NRA “had made progress since 2017 with its course correction” and that testimony showed that the NRA “now understood the importance of compliance”. The court determined that correcting the NRA’s course, financial stability, continued improvement in governance and internal controls, and a number of other reasons weighed against keeping the NRA bankrupt with the appointment of ‘a trustee or examiner.

Why this case is interesting

Court dismissed NRA bankruptcy cases without prejudice, but warned the NRA that if it files a new bankruptcy case, the court “would immediately address some of its concerns about disclosure, transparency, secrecy, conflicts of interest of executives and litigation lawyers , and the unusual involvement of litigation lawyers in NRA cases, which could result in the appointment of a trustee because the NRA could not fulfill the fiduciary duty required by the Bankruptcy Code for a debtor in possession. So he left the door open for the NRA to testify again, but warned them to think long and hard about doing so. If the NRA files a short-term case, it appears the court will not hesitate to appoint a trustee.

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