Judge Harlin D. Hale of the United State Bankruptcy Court for the Northern District of Texas dismissed the chapter 11 bankruptcy case filed by the National Rifle Association (the “NRA”) for cause, finding that the case was not filed in good faith.1 In its 38-page opinion issued in connection with multiple motions to dismiss and a motion to appoint an examiner (and after 12 days of trial testimony from 23 witnesses) the Court found that there was cause to dismiss the case because “the NRA’s bankruptcy petition was not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage” in a dissolution action brought by the State of New York “and as an effort to avoid a regulatory scheme.”
The Filing and Dismissal
In August 2020 the New York Attorney General filed a complaint seeking, among other things, dissolution of the NRA (the “NYAG Enforcement Action”). The complaint also sought other relief such as restitution from officers and it named certain individuals, including the NRA’s Executive Vice President Wayne LaPierre, as defendants in the complaint.
The NRA filed its chapter 11 case on January 15, 2021. Several parties in interest filed motions seeking dismissal for cause under section 1112(b) of the Bankruptcy Code or the appointment of a chapter 11 trustee or an examiner. Relying on Fifth Circuit authority, the Bankruptcy Court noted that 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 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). Furthermore, courts have held that a chapter 11 petition is not filed in good faith unless it serves a valid bankruptcy purpose. Off. Comm. of Unsecured Creditors v. Nucor Corp. (In re SGL Carbon Corp.), 200 F.3d 154, 165 (3d Cir. 1999).
In examining whether the NRA’s Chapter 11 case was filed in good faith, the Court applied a “totality of the circumstances approach” to filing requirements and considered the following two inquiries particularly relevant to the question of good faith: (1) whether the petition serves a valid bankruptcy purpose and (2) whether the petition is filed merely to obtain a tactical litigation advantage. In re 15375 Mem’l Corp., 589 F.3d 605, 618 (3d Cir. 2009).
The NRA’s stated purposes for filing for bankruptcy, with some variations in pleadings and public statements, ostensibly were to (1) centralize and streamline litigation and claims, (2) reduce costs and reorganize the corporate structure and (3) move its corporate domicile to Texas. However, the Court noted that that the NRA or its representatives, through various statements and filings, heavily emphasized the move to Texas as having the effect of avoiding the NYAG Enforcement Action. This seemed to be the most consistently stressed reason for the filing. Indeed, in its opening statement, the NRA attorneys said the NRA was seeking to avoid “the death penalty” by filing for bankruptcy. As a result of the trial, and relying heavily on Mr. LaPierre’s testimony, the Court determined that the NRA’s purported reasons for filing were not genuine and that the evidence demonstrated the true reason for filing for bankruptcy was to escape the NYAG Enforcement Action.
In dismissing the bankruptcy case, the Court explained that if the NRA could escape the NYAG Enforcement Action through the bankruptcy process, this would clearly give the NRA an unfair litigation advantage and subvert the State of New York’s ability to regulate not-for-profit corporations under its laws. The Court distinguished between debtors who seek relief from monetary judgments and those who seek to avoid state regulation: “Debtors commonly file bankruptcy when faced with a judgment that has, or will, render them insolvent, but the threat against the NRA differs from the classic scenario in that dissolution would not be a collateral effect of litigation but rather the intended relief sought in a state’s regulatory action. And in this instance, dissolution could only occur after judicial consideration of whether dissolution is in the best interest of the public.” The Court noted that while “bankruptcy courts can apply regulatory law, a bankruptcy case filed for the purpose of avoiding a regulatory scheme is not filed in good faith and should be dismissed.”
The Court Relied on Mr. LaPierre’s Testimony
Shortly before the bankruptcy filing, the NRA’s board of directors held a meeting on January 7, 2021 to, among other things, approve a new employment agreement for Mr. LaPierre. The new employment agreement contained language permitting him to “exercise corporate authority in furtherance of the mission and interests of the NRA, including without limitation to reorganize or restructure the affairs of the Association for the purposes of cost- minimization, regulatory compliance or otherwise.” Through testimony at the trial, the Court learned that throughout the entirety of the board meeting, both in the general and executive sessions, no discussion of bankruptcy, chapter 11 or the possible reorganization of the NRA occurred. The board of directors was not informed that the language cited above could authorize Mr. LaPierre to unilaterally authorize file a bankruptcy petition on behalf of the NRA. In fact, the board of directors was not informed that the NRA was considering filing for bankruptcy at all. Mr. LaPierre and only four other people in the NRA (excluding the Chief Financial Officer or the General Counsel) knew of the plan to file chapter 11.2
Because Mr. LaPierre was so central to the filing of the case, there was no need to resolve inconsistent or conflicting reasoning and motivations of individuals who all had an equal say in the decision. Rather, the Court found that the ultimate decision to file for bankruptcy was made solely by Mr. LaPierre. Mr. LaPierre’s testimony as to the reasons for filing for bankruptcy demonstrated how important the move to Texas from New York was for the NRA. Mr. LaPierre stated that the NRA sought a “fair legal playing field where the NRA could grow and prosper in a fair legal environment.” The NRA’s public communications also stated that it commenced a Chapter 11 petition primarily because of “the unhinged and political attack against the NRA by the New York Attorney General.” Mr. LaPierre confirmed that the NRA’s financial position did not necessitate the filing and that if the case was dismissed the NRA would be able to pay all of its debts. The Court found the following exchange to be helpful:
Q: Okay. So it comes down to the reason you filed Chapter 11 is because you have this New York attorney general enforcement action which is asking for dissolution of the NRA; is that correct?
[Counsel for the NRA]: Objection; misstates his testimony.
[Counsel for the Movant]: Well –
THE COURT: Well, I’m going to go ahead and let him answer that. Try to give an answer to that, Mr. LaPierre.
THE WITNESS: Yes, Your Honor. Yes, we filed the Chapter 11 to — because the New York State attorney general is seeking dissolution of the NRA and [seizure of] its assets, and we believe it’s not a fair, level playing field.
. . . .
Q: So really what we’re down to is that it’s — the New York attorney general action is the reason you believe you need to be in bankruptcy, and, really, solvency and all your other litigation, those are not issues that would require you to be in bankruptcy; is that correct?
A: That’s correct.
The Court characterized the foregoing exchange as demonstrating that “but for the NYAG Enforcement Action, it would not have been necessary to file for bankruptcy.” Therefore, based on Mr. LaPierre’s unique standing within the NRA and his recently granted authority under which he could unilaterally cause the NRA to file for bankruptcy, the NRA’s fortunes in the case were directly tied to his testimony evidencing that the NRA’s Chapter 11 filing was made for the purpose of escaping from the NYAG Enforcement Action. As this showed a lack of good faith in filing, the NRA’s case was dismissed.
The NRA’s case, and its dismissal, should demonstrate that the bankruptcy courts will see through a debtor’s attempt to forum-shop its way out of a state regulatory action. If presented with a motion to dismiss a chapter 11 case for cause, a court will look to determine the true purpose or purposes for filing for bankruptcy. In the NRA case, the Court found that Mr. LaPierre’s testimony would be the most direct evidence of the purpose for filing because he had unilateral authority to file the bankruptcy. Potential debtors should be prepared to provide credible evidence of a valid bankruptcy purpose for filing, which cannot be to avoid a state regulatory action, to help survive a motion to dismiss for cause.
- The Court also found that the appointment of a chapter 11 trustee or examiner would not have been in the best interests of creditors and the estate.
- The Court expressed concern about the “surreptitious manner in which Mr. LaPierre obtained and exercised authority to file bankruptcy for the NRA.” It stated that excluding the board and important officers from the process was “nothing less than shocking.”