NRA bankruptcy case dismissed for cause because it was not filed in good faith | Fox Rothschild LLP

Judge Harlin D. Hale of the United States Bankruptcy Court for the North District of Texas dismissed the Chapter 11 bankruptcy case filed by the National Rifle Association (the “NRA”) for cause, finding that the The case had not been filed in good faith.1 In its 38-page opinion issued in connection with several motions to dismiss and a motion for the appointment of an examiner (and after 12 days of testimony at the trial of 23 witnesses), the Court concluded that it was appropriate to dismiss the case because “the NRA’s bankruptcy petition was not filed in good faith, but was instead filed for the purpose of obtaining an unfair litigation advantage” in a dissolution action brought by the ‘New York State’ and for the purpose of avoiding a regulatory regime ‘.

Filing and dismissal

In August 2020, the New York Attorney General filed a complaint requesting, among other things, the dissolution of the NRA (the “NYAG Enforcement Action”). The lawsuit also called for other remedies such as the restitution of officers and it named certain people, including NRA executive vice president Wayne LaPierre, as defendants in the lawsuit.

The NRA filed its Chapter 11 case on January 15, 2021. Several interested parties have filed motions requesting the dismissal for cause under Section 1112 (b) of the Bankruptcy Code or the appointment of a Chapter 11 trustee. or an examiner. Relying on the authority of the Fifth Circuit, the Bankruptcy Court noted that the term “cause” provides flexibility to bankruptcy courts and may include a finding that the filing of the debtor’s claim for relief is not in good faith. In the case of Little Creek Dev. Co., 779 F.2d 1068, 1072-73 (5th Cir. 1986); In re Humble Place Joint Venture, 936 F.2d 814, 816-17 (5th Cir. 1991). Further, the courts have ruled that a Chapter 11 petition is not filed in good faith unless it serves a valid bankruptcy purpose. Disabled. Comm. of Unsecured Creditors v. Nucor Corp. (In re SGL Carbon Corp.), 200 F.3d 154, 165 (3d Cir. 1999).

In considering whether the NRA Chapter 11 case was filed in good faith, the Court applied a “totality of the circumstances approach” to the filing requirements and considered the following two inquiries to be particularly relevant to the issue of good faith: (1) whether the petition serves a valid bankruptcy purpose and (2) whether the petition is filed simply to gain a tactical advantage in litigation. In re 15375 Mem’l Corp., 589 F.3d 605, 618 (3d Cir. 2009).

The stated goals of the NRA for bankruptcy, with some variation in pleadings and public statements, were ostensibly to (1) centralize and streamline litigation and claims, (2) reduce costs and reorganize the corporate structure and (3) move its headquarters to Texas. However, the Court noted that the NRA or its representatives, through various statements and documents, strongly insisted on the move to Texas as having the effect of avoiding coercive action by the NYAG. This seemed to be the most frequently cited reason for the deposit. Indeed, in its opening statement, NRA lawyers said the NRA sought to avoid “the death penalty” by filing for bankruptcy. Following the trial, and relying heavily on Mr. LaPierre’s testimony, the Court determined that the alleged reasons for filing the NRA were not genuine and that the evidence demonstrated that the real reason for filing toll was to evade NYAG Enforcement Action.

In dismissing the bankruptcy case, the Court explained that if the NRA could evade NYAG enforcement action through the bankruptcy process, it would clearly give the NRA an unfair litigation advantage and undermine the ability of New York State to regulate nonprofit corporations. under its laws. The Court distinguished between debtors seeking relief from pecuniary judgments and those seeking to avoid state regulation: “Debtors generally file for bankruptcy when faced with a judgment that made or rendered them. will render insolvent, but the threat to the NRA differs from the scenario in which dissolution would not be a collateral effect of litigation, but rather the remedy sought under regulatory action by a state. And in this case, the dissolution could only take place after judicial review of whether the dissolution is in the best interest of the public. The Court noted that although “bankruptcy courts may apply regulatory law, a bankruptcy case filed to avoid a regulatory regime is not filed in good faith and must be dismissed.”

The Court relied on the testimony of Mr. LaPierre

Shortly before the bankruptcy filing, the board of directors of the NRA met on January 7, 2021 to, among other things, approve a new employment contract for Mr. LaPierre. The new employment contract contained language allowing him to “exercise the authority of the company in the pursuit of the mission and interests of the NRA, including, without limitation, to reorganize or restructure business. of the Association for the purposes of cost minimization, regulatory compliance or otherwise ”. Through testimony at trial, the court heard that throughout the board meeting, both general and executive sessions, no discussion of bankruptcy, Chapter 11, or the possible reorganization of the NRA did not take place. The board was not informed that the language cited above could authorize Mr. LaPierre to unilaterally authorize the filing of a bankruptcy petition on behalf of the NRA. In fact, the board was not at all informed that the NRA was considering filing for bankruptcy. Mr. LaPierre and only four other people from the NRA (apart from the CFO or the legal director) were aware of the plan to file Chapter 11.2

Since Mr. LaPierre played a central role in bringing the case forward, there was no need to resolve the inconsistent or conflicting reasoning and motivations of individuals who all had a say in the decision. Rather, the Court concluded that the ultimate decision to declare bankruptcy was made solely by Mr. LaPierre. Mr. LaPierre’s testimony on the reasons for filing for bankruptcy demonstrated how important the move from New York to Texas was to the NRA. Mr. LaPierre said the NRA was looking for “a level playing field where the NRA can thrive and prosper in a fair legal environment.” The NRA’s public communications also indicated that it had launched a Chapter 11 petition primarily due to “the political and unbalanced attack on the NRA by the New York attorney general.” Mr LaPierre confirmed that the NRA’s financial situation did not require the filing and that if the case was closed the NRA would be able to pay all of its debts. The Court found the following exchange useful:

Q: Okay. So the reason you filed Chapter 11 is because you have this enforcement action from the New York Attorney General asking for the dissolution of the NRA; Is it correct?

[Counsel for the NRA]: Objection; distorts his testimony.

[Counsel for the Movant]: Good –

THE COURT: Well, I’ll go ahead and let him answer that. Try to answer that, Mr. LaPierre.

A. Yes, Your Honor. Yes, we filed Chapter 11 at – because the New York State Attorney General is asking for the NRA to be dissolved and [seizure of] its assets, and we think that’s not a level playing field.

. . . .

Q: Really what we’re looking at is the action of the New York attorney general is the reason you think you must be bankrupt, and, really, the solvency and all your other litigation. , these are not problems that would require you to be bankrupt; Is it correct?

A: That’s right.

The court characterized the foregoing exchange as demonstrating that “without NYAG’s enforcement action there would have been no need to file for bankruptcy.” Therefore, based on Mr LaPierre’s unique status within the NRA and his recently granted authority under which he could unilaterally file for bankruptcy of the NRA, the NRA’s fortunes in this case were directly linked. to his testimony showing that the filing of Chapter 11 of the NRA was made in order to escape NYAG enforcement action. As this showed a lack of good faith in the filing, the NRA case was dismissed.

Take away food

The NRA case, and its dismissal, should demonstrate that bankruptcy courts will see through a debtor’s attempt to force its way out of state regulatory action. If presented with a motion to dismiss a Chapter 11 case for cause, a court will seek to determine the true purpose (s) of the bankruptcy filing. In the NRA case, the Court concluded that Mr. LaPierre’s testimony would be the most direct evidence of the purpose of the filing because he had the unilateral power to file bankruptcy. Prospective debtors should be prepared to provide credible evidence of a valid bankruptcy goal for the filing, which may not be to avoid state regulatory action, to help survive a request to dismiss for cause. .

Remarks:

  1. The Court also concluded that the appointment of a Chapter 11 trustee or examiner would not have been in the best interests of the creditors and the estate.
  2. The court expressed concern about the “clandestine manner in which Mr. LaPierre obtained and exercised the power to file for bankruptcy for the NRA.” He said the exclusion of the board and key leadership from the process was “nothing short of shocking.”

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