United States Bankruptcy Judge Harlin Hale recently dismissed the National Rifle Association’s Chapter 11 petition as not filed in good faith.  The decision leaves the 150-year-old gun-rights organization susceptible to the New York Attorney General’s suit seeking to dissolve it.

In August 2020, New York Attorney General Letitia James (the “NYAG”) filed a lawsuit seeking to dissolve the National Rifle Association (the “NRA”), a non-profit organized in New York.  The NYAG accused the NRA and members of its senior leadership of diverting millions of dollars away from its charitable mission for their personal use, awarding contracts benefiting close associates and family, and “appearing to dole out lucrative no-show contracts to former employees in order to buy their silence and continued loyalty.”  The NYAG alleged four individuals in particular spent huge sums of the NRA’s money on, for example, trips to the Bahamas, private jets, expensive meals, and other travel. 

On January 7, 2021, the NRA petitioned for Chapter 11 bankruptcy in the Northern 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. N.D. Tex. May 11, 2021) (“In re NRA”).  A former vendor of the NRA, the NYAG, and others quickly moved to dismiss the Petition pursuant to 11 U.S.C. § 1112(b)(1).  Subject to certain exceptions, section 1112(b)(1) permits a party in interest to move to dismiss a Chapter 11 petition “for cause.”  A non-exclusive list of “cause[s]” is provided, but “the term ‘cause’ affords flexibility to the bankruptcy courts and can include a finding that the debtor’s filing for relief is not in good faith.”  In re NRA at *7.

After expedited discovery and a brief trial, the court rejected the NRA’s proffered reasons for filing the Petition and found it was not filed in good faith.  The NRA asserted that it filed the Petition to, inter alia, centralize and streamline litigation and creditor disputes and reemerge as a Texas-based nonprofit.  The NYAG and others countered that the Petition was meant to evade regulatory oversight, an impermissible use of bankruptcy proceedings.  Id. at *7-8.  On cross examination, the NRA’s Executive Vice President, Wayne LaPierre, testified that the NRA filed the Petition “because the [NYAG] is seeking dissolution of the NRA and [seizure of] its assets, and we believe it’s not a fair, level playing field.”  Mr. LaPierre also affirmed that “solvency and all [the NRA’s] other litigation . . . are not issues that would require [the NRA] to be in bankruptcy.”  Further, Mr. LaPierre affirmed the accuracy of one of the NRA’s public communications about the Petition, which stated in a Q&A section that “[t]his action is necessitated primarily by one thing: the unhinged and political attack against the NRA by the [NYAG].”  Based on this and other testimony, the Court found “that the primary purpose of the bankruptcy filing was to avoid potential dissolution in the NYAG Enforcement Action.”  Id. at *11-13. 

Having identified the Petition’s primary purpose, the court turned to whether that motivation “was a valid purpose for bankruptcy such that the bankruptcy was filed in good faith.”  The court concluded that it was not, reasoning that the NRA’s purpose for filing for bankruptcy was “less like a traditional bankruptcy case in which a debtor is faced with financial difficulties or a judgment that it cannot satisfy and more like cases in which courts have found 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 “end the NYAG Enforcement Action immediately, [] it was to deprive the NYAG of the remedy of dissolution, which is a distinct litigation advantage.”  Further, per Judge Hale, using the bankruptcy process to avoid dissolution “deprives the state of New York of the ability to regulate not-for-profit corporations in accordance with its laws.”  Id. at *13-15.

Thus, the court found that “based on the totality of the circumstances, [] the NRA’s bankruptcy petition was not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage . . . and as an effort to avoid a regulatory scheme.”  Neither was “a purpose intended or sanctioned by the Bankruptcy Code.”  Accordingly, the court found cause to dismiss the case.  Id. at *16-19.

While Judge Hale’s analysis was fact-specific, the case demonstrates the scrutiny courts may apply when analyzing the propriety of Chapter 11 petitions.  Judge Hale noted the “at times slightly different[] reasons” the NRA provided for filing the Petition, hinting that the inconsistencies drew suspicion.  Id. at *7.