Not In My Court: North Texas District Bankruptcy Court Dismisses NRA Bankruptcy Cases As Filed In Bad Faith | King and Spalding

On May 11, 2021, Judge Harlin D. Hale of the North Texas District Bankruptcy Court (the “Search“) found that the bankruptcy cases of the National Rifle Association of America (“RNA“) and its subsidiary Sea Girt LLC (collectively, the”Debtors”)1 were filed in bad faith to (i) gain an unfair litigation advantage and (ii) avoid the New York State regulatory regime.2 The court dismissed the cases without prejudice, but noted that if the NRA files a new case, the court will reconsider its concerns about, among other things, disclosure, transparency, secrecy and conflicts of interest, which could result in the appointment of a trustee to deal with the ability of the NRA, as a debtor in possession, to fulfill its fiduciary obligations.

CONTEXT:

The NRA is a 150-year-old New York nonprofit corporation headquartered in Fairfax, Virginia. On August 6, 2020, the New York Attorney General (“NYAG“) filed a lawsuit in New York State Court against (i) the NRA (“NYAG share“) and (ii) certain individual defendants, including NRA Executive Vice President Wayne LaPierre, for, inter alia, breach of fiduciary duty, serious mismanagement, illicit related party transactions, self-operation and enrichment As a remedy, the NYAG called for (i) the dissolution of the NRA, (ii) the return of funds, (iii) a ban on certain agents serving as trustees for a New York charity and (iv) cancellation of certain transactions.3

On September 10, 2020, the president of the NRA created a special litigation committee to oversee, among other things, the NYAG action (as well as other lawsuits). Subsequently, on January 7, 2021, the NRA held a board meeting at which the board passed a resolution formalizing the special litigation committee and approving a new employment contract for Mr. furthering the mission and interests of the NRA, including, without limitation, reorganizing or restructuring the affairs of the Association for the purposes of cost minimization, regulatory compliance or otherwise.4 No discussion of bankruptcy or the possible reorganization of the NRA took place at that meeting, and the board was not advised that the language could authorize Mr. LaPierre to unilaterally allow a bankruptcy petition.

On January 15, 2021, (i) the NRA and (ii) Sea Girt LLC, a 100% NRA-owned Texas limited liability company, which was incorporated on November 24, 2020 (approximately two months before filing for bankruptcy ),5 filed for Chapter 11 bankruptcy. Through the filing, the debtors sought to restructure themselves as a Texas nonprofit and “get out of what they believe to be a corrupt political and regulatory environment in New York.” – in fact, to “empty New York”. At the time of filing, the NRA claimed it “is in its strongest financial position in years”,6 and noted that he would come up with a plan that pays creditors in full.

Subsequently, on February 10 and 12, respectively, (i) Ackerman McQueen, Inc.7 – the Debtors’ former advertising agency, the largest unsecured creditor and counterparty in a lawsuit currently pending before the US District Court for the Northern District of Texas – and (ii) the NYAG,8 each filed motions to dismiss the debtors’ bankruptcy cases and, in turn, to seek the appointment of a Chapter 11 trustee (collectively, the “”Motions to dismiss“).9 In general, the Motions for Dismissal asserted (among other things) that the files had been filed in bad faith, solely as a contentious tactic (not to reorganize or respond to financial crises – the Debtors being solvent) and, given the embezzlement and lack of oversight, there were grounds for appointing a trustee (rather than allowing the NRA to continue to run their affairs as debtor-in-use). In support of their positions, the mover underlined (i) the absence of board authorization and notice of bankruptcy, which was authorized only by Mr. LaPierre based on his approved employment contract. January 7, 2021, and (ii) a post-filing attempt to retroactively ratify the bankruptcy filing.

DECISION:

After a 12-day trial that included 23 witnesses, the court dismissed the bankruptcy cases for “cause” under Article 1112 (b) of the Bankruptcy Code, finding that the cases had not been filed in good faith. and that the appointment of a trustee or examiner was not in the best interests of creditors and estates.ten In assessing the “good faith” of the Debtors, the Court considered whether the bankruptcies had been filed (i) for a valid purpose of bankruptcy and (ii) simply to gain a tactical advantage in litigation.

Ultimately, the court concluded that the purpose of the filings was to avoid the potential dissolution of the NRA in NYAG action. In reaching this conclusion, the Court focused on Mr. LaPierre’s testimony to establish that (i) the deposit was unrelated to the financial condition of the NRA (since the NRA is in good financial health),11 (ii) if the case were dismissed, the NRA would be able to pay its debts in full and meet its obligations and (iii) were it not for the NYAG action, a bankruptcy filing by the NRA would not have been necessary.

As such, the Court concluded that “[t]a NRA is a solvent and growing organization that uses bankruptcy as a tool to win its dissolution lawsuit, and that is not an appropriate use of bankruptcy.12 The Court distinguished the present case from the more typical case, where a debtor files for bankruptcy to avoid a potential monetary judgment constituting an existential threat. Here, on the other hand, the NRA sought to deprive the NYAG of the legal remedy of dissolution (if the NYAG could reach certain high thresholds),13 and the Court concluded that the “Bankruptcy Code does not offer a refuge from this kind of threat”.14 In addition, the use of bankruptcy proceedings to avoid dissolution deprived New York State of the ability to regulate its not-for-profit corporations in accordance with its laws. As such, the Court concluded that the bankruptcy filings were intended (i) to gain a litigation advantage and (ii) to avoid a regulatory scheme, each of which amounted to bad faith for the purposes of the article 1112 (b).

The Court then considered whether the appointment of a trustee or examiner was in the best interests of creditors and assets, but found that such relief was not warranted. Specifically, the court was concerned about the “lingering problems of secrecy and lack of transparency” and, in particular, the “surreptitious manner” in which Mr. LaPierre obtained and exercised the power to file for bankruptcy for the NRA.15 The Court noted that “[e]Excluding so many people from the decision-making process to file for bankruptcy, including the vast majority of the board, the CFO and the general counsel, is nothing short of shocking.16 However, the Court also noted, among other things, that the NRA was financially sound and, outside of bankruptcy, could pay its creditors, continue to fulfill its mission and improve its governance and internal controls, and challenge the dissolution of the NYAG share. As such, the court found that these factors weighed in favor of the termination, rather than keeping the cases bankrupt.

CONCLUSION:

The NRA bankruptcy cases are a unique situation given, among other things, their high-profile nature, the ongoing litigation with the NYAG, and the nature of the allegations against the NRA and Mr. LaPierre. Nonetheless, the cases offer valuable lessons and considerations regarding the scope of bankruptcy protections and the justifications for filing. In addition, the cases highlight (i) the importance and necessity of formalities and business processes and (ii) the care and thought that should go into the planning and implementation of a coherent restructuring. , justifiable and achievable.

1 The cases were administered jointly under case number 21-30085-hbh-11. Quotes to “[ECF No. __]»Refers to the documents filed on the roll in the captioned case In re National Rifle Association of America and Sea Girt LLC, No. 21-30085 (HDH) (Bankr. ND Tex. May 11, 2021).

2 Order granting the motions for dismissal, In re National Rifle Association of America and Sea Girt LLC, No. 21-30085 (HDH) (Bankr. ND Tex. 11 May 2021), ECF No. 740 (the “Dismissal order“).

3 The lawsuit, which remains pending, has given rise to related litigation, additional federal lawsuits, and motion practices, including motions to dismiss and relocate.

4 See Order of dismissal, at 8.

5 NRA abandons New York to reintegrate in Texas, announces new strategic plan, NRA, January 15, 2021, https://www.nraila.org/articles/20210115/nra-dumps-new-york-to-reincorporate-in-texas-announces-new-strategic-plan.

6 Identifier.

7 See Motion to dismiss the Chapter 11 bankruptcy petition or, in the alternative, Motion to appoint a Chapter 11 trustee and supporting brief [ECF No. 131].

8 See Motion for dismissal or, alternatively, for the appointment of a trustee under Chapter 11 [ECF Nos. 155 and 156].

9 Subsequently, among other things, (i) the District of Columbia filed motions in support of the NYAG motion to appoint a trustee [ECF No. 214] and dismiss the business [ECF Nos. 423 and 429], (ii) Christopher Cox, former executive director of the NRA Institute for Legislative Action, joined the NYAG motion [ECF No. 172], (iii) the United States Trustee, in oral argument, argued that the evidence supported the termination, appointment of a trustee, or appointment of an examiner, (iv) sixteen other states sought leave to present a thesis as amici curiae in favor of debtors [ECF No. 439], which the Court granted on March 31, 2021 [ECF No. 439] and (v) the official Unsecured Creditors Committee appointed in the cases also objected to the relief sought in the dismissal motions, arguing, among other things, that bankruptcy proceedings were in the best interests of creditors (but a suggested a trustee with limited powers as the Court was inclined to appoint a Chapter 11 trustee) [ECF No. 369].

10 Article 1112 (b) of the Bankruptcy Code provides that “the court shall convert a case under this Chapter into a case under Chapter 7 or dismiss a case under this Chapter, whichever is best creditors and the estate, for cause, except the court determines that the appointment under Section 1104 (a) of a trustee or examiner is in the best interests of the creditors and the estate. 11 USC § 1112 (b).

11 Order of dismissal, p. 28.

12 Identifier. to 32.

13 See N-PCL §§ 1101 and 1102; see also Order of dismissal, p. 28.

14 Order of dismissal, p. 28.

15 Identifier. to 34.

16 Identifier.

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