On Tuesday, May 11, 2021, Judge Harlin D. Hale of the U.S. Bankruptcy Court, Northern District of Texas, dismissed the National Rifle Association of America’s Chapter 11 bankruptcy case. Judge Hale warned that, should the NRA file a new bankruptcy case, the Court would consider appointing a trustee to fulfill the fiduciary duties required for a debtor in possession.
The NRA is a 150-year-old organization dedicated to the rights of Americans to own and safely use firearms for personal protection and recreational use. The attorney general for the state of New York, Letitia James, previously conducted an investigation lasting 15 months that allegedly revealed “widespread misuse of assets by the NRA’s executive vice president and his circle of insiders for their personal benefit.” James then filed a lawsuit seeking dissolution of the NRA. In response, the NRA filed a Chapter 11 bankruptcy case in Texas since “dissolution could only occur after judicial consideration of whether dissolution is in the best interest of the public.”
The legal question presented to Judge Hale was “whether the existential threat facing the NRA is the type of threat the Bankruptcy Code is meant to protect against.” In his 38 page order dismissing the bankruptcy case, Judge Hale outlined his reasons why the Bankruptcy Code should not protect the NRA against dissolution. Judge Hale found the case as not having been filed in good faith “because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme.”
In discussing the motion to dismiss, Judge Hale first outlined the multiple, and at times slightly different, stated reasons for why the NRA filed the case. After an examination of the evidence and testimony presented in the case, Judge Hale found that “[t]he evidence does not support a finding that the purpose of the NRA’s bankruptcy filing was to reduce operating costs, to address burdensome executory contracts and unexpired leases, to modernize the NRA’s charter and organization structure, or to obtain a breathing spell.” In coming to this conclusion, Judge Hale relied on testimony from NRA Acting Interim CFO Sonya Rowling, NRA Secretary and General Counsel John Frazer, and NRA Executive Vice President Wayne LaPierre, among others.
Judge Hale then conducted an analysis of whether the NRA filed bankruptcy to achieve a valid bankruptcy purpose such that the bankruptcy was filed in good faith. Judge Hale expressed concern about this case as an attempt to avoid dissolution being sought as a remedy in a state regulatory action: “There is a difference, however, between a lawsuit in which a party seeks a monetary judgment that would pose an existential threat to a debtor and one where the attorney general of a state is specifically seeking dissolution of a debtor under the state’s laws and therefore required to satisfy standards and requirements that specifically justify dissolution.” Because Article 11 of the New York Not-For-Profit Corporation Law requires the New York Attorney General to satisfy a high burden to dissolve the NRA, Judge Hale found that this case is not the type of dissolution case that the Bankruptcy Code is meant to protect against. “[T]he Bankruptcy Code does not provide sanctuary from this kind of a threat.”
Judge Hale found the NRA’s case less like a traditional bankruptcy case 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. . . Courts have consistently held that a bankruptcy case filed for the purpose of obtaining an unfair litigation advantage is not filed in good faith and should be dismissed.” Further, Judge Hale stated that the NRA’s attempt to avoid dissolution is “problematic because it deprives the state of New York of the ability to regulate not-for-profit corporations in accordance with its laws.” Continuing on, Judge Hale noted that “the NRA is financially healthy and potentially adverse litigation outcomes are too attenuated to justify a good faith bankruptcy filing.”
Ultimately, Judge Hale did not appoint a trustee or examiner for the NRA. However, Judge Hale warned that such an appointment might be necessary if the NRA filed a new bankruptcy case “out of a concern that the NRA could not fulfill the fiduciary duty required by the Bankruptcy Code for a debtor in possession.” The case was dismissed without prejudice.
Additional Reading
In Rebuke to N.R.A., Federal Judge Dismisses Bankruptcy Case, The New York Times (May 11, 2021)
In re: National Rifle Association fo America and Sea Girt, LLC
Order Granting Motion to Dismiss In re National Rifle Association of America and Sea Girt, LLC
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