Questions and Answers on Law | When bankruptcy is filed in bad faith | Entrepreneurs
In case you haven’t heard the headline shots, a few weeks ago the National Rifle Association saw its bankruptcy case dismissed (finished, kicked out, shot to legal death).
The NRA filed for bankruptcy in Texas in January. The bankruptcy judge presiding over the NRA Chapter 11 case ruled that she filed the case in bad faith. What does it mean to file a bad faith bankruptcy request? Bankruptcy courts are all federal courts established by Congress under the provision of the Constitution granting Congress exclusive power to legislate a uniform code of bankruptcy laws. To administer its bankruptcy laws, Congress has created bankruptcy courts with a bankruptcy judge appointed to preside over each court. There are different types of bankruptcies, called “chapters”, in which a party (the “debtor”) may be in seeking relief from their creditors. One of them is Chapter 11. Chapters 11 are typically used by businesses to try to repay their creditors in whole or in part under payment plans approved by the bankruptcy court. . “
“Cause” is not defined in the bankruptcy code, except for a non-exclusive list of things generally relating to a debtor’s failure to meet the requirements demanded of the debtor during bankruptcy proceedings.
But one of the “causes” of dismissal that do not appear on these lists but which are recognized by many bankruptcy courts is the “bad faith filing” of the bankruptcy case.
“Bad faith filing” is not even a term found in the bankruptcy code. This is a principle that has evolved over time with many bankruptcy courts.
It is the idea that the mere act of filing for bankruptcy by a debtor, which puts an end to many, if not most, actions by creditors to collect debts, has a nefarious purpose which Congress does not had no intention of benefiting debtors. And this is what the NRA bankruptcy judge concluded after several NRA Chapter 11 parties asked the judge to dismiss the case. Bad faith consisted in using the legal remedies to stop or block legal proceedings brought by the New York attorney general’s office against the NRA. The NYAG was seeking to dissolve the NRA under New York State law due to allegedly huge and long-term fraud perpetrated by its top executives and their insiders in the misuse of NRA funds , all in violation of New York law. The NRA was incorporated as a not-for-profit corporation under New York law.
The NRA’s argument for filing for bankruptcy was to reorganize and be recreated under Texas law. Indeed, he was seeking to permanently move his assets and existence beyond the reach of the NYAG.
No, no, said the Texas bankruptcy judge. The company was well solvent and insured its day-to-day operating expenses.
The ultimate goal of the filing was to try and stop a legal act of law enforcement permanently. And that’s not what bankruptcy is for.
As of this writing, no appeal for his dismissal has been made by the NRA. If he doesn’t appeal the dismissal, he will have to immediately defend himself against the NYAG shootout of fraud allegations.
The NRA’s banana-clip of legal arguments has stalled.
Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. Send your questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.