Following a 12-day trial with 23 witnesses, Bankruptcy Judge Harlan D. Hale dismissed the chapter 11 petition filed by the National Rifle Association, finding that the filing was “not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage in the [action by the New York Attorney General to dissolve the NRA] and as an effort to avoid a regulatory scheme.”
Judge Hale found that the NRA was “in its strongest financial condition in years” and that its “primary legal problem [was the] state regulatory action.” As a “solvent and growing organization,” he said that “using this bankruptcy as a tool to win the dissolution lawsuit” was “not an appropriate use of bankruptcy.”
Judge Hale dismissed the case “without prejudice,” meaning that the NRA can attempt chapter 11 reorganization once more.
However, Judge Hale ended his 37-page opinion on May 11 by warning the NRA that he may appoint a trustee if the organization files again, given the “cringeworthy facts” that came out during trial. He also alluded to the “surreptitious manner” in which the petition was filed, saying it was “nothing less than shocking.”
The Leadup to the Chapter 11 Filing
The New York Attorney General had conducted a 15-month investigation of the NRA, culminating in August 2020 with the filing of a complaint seeking dissolution of the NRA, among other relief. The Attorney General did not seek appointment of a receiver.
At a meeting in January 2020, the NRA board adopted a resolution giving Wayne LaPierre, the organization’s executive vice president, authority “to reorganize or restructure the affairs of the Association for the purpose of cost-minimization, regulatory compliance or otherwise.” [Emphasis added.]
Eight days later, the NRA filed a chapter 11 petition in Dallas, where the case was assigned to Judge Hale. In his opinion, Judge Hale said that the board “was not informed that the NRA was considering filing bankruptcy at all.”
About three weeks into the chapter 11 case, an NRA board member filed a motion seeking appointment of an examiner. Two days later, the NRA’s former advertising firm filed a motion to dismiss or, alternatively, appoint a chapter 11 trustee. Soon thereafter, the New York Attorney General filed her own motion to dismiss.
The official creditors’ committee wanted management to remain in place and not be replaced by a chapter 11 trustee, or one with only limited powers if the court wanted a trustee. The committee saw no reason for an examiner.
The State of Texas and 15 other states filed amici briefs supporting the NRA.
The Reason for Filing
The movants wanted three forms of relief: dismissal, a chapter 11 trustee or an examiner.
Judge Hale first addressed the dismissal motions and the reasons for the NRA’s filing. At different times, he said that the NRA had given “slightly different” reasons for the filing.
Because LaPierre made the “ultimate decision,” Judge Hale said that his testimony was “the most compelling evidence.” Based on LaPierre’s testimony, he concluded that “the real driving force” behind the filing “was not related to the NRA’s financial condition,” because the NRA could pay its debts in full if the bankruptcy were dismissed.
Rather, Judge Hale quoted LaPierre as saying, in substance, that the filing was designed to head off dissolution by the New York Attorney General.
Judge Hale found that the “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.” Likewise, he concluded that a desire “to leave New York and reincorporate in Texas . . . was not the real purpose for filing.”
“Based on the statements of counsel and the evidence in the record,” Judge Hale summed up by finding “that the primary purpose of the bankruptcy filing was to avoid potential dissolution in the NYAG Enforcement Action.”
Filing for an Improper Purpose
Judge Hale then turned to deciding whether avoiding dissolution by the state “was a valid purpose for bankruptcy.”
To dissolve the NRA, the New York Attorney General had told Judge Hale that she must prove there was looting or waste of corporate assets or that the persons in control “otherwise acted in an illegal, oppressive or fraudulent manner.”
Quickly, Judge Hale said that “dissolution that requires this showing is not the type of dissolution that the Bankruptcy Code is meant to protect against.” He said that the NRA’s purpose in filing 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.”
Citing cases, Judge Hale said that 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.”
Dismissing other explanations for filing, Judge Hale found that “the NRA is financially healthy” and that adverse results in litigation “are too attenuated to justify a good faith bankruptcy filing.”
Based on the “totality of the circumstances,” Judge Hale found cause for dismissal under Section 1112(b)(1) because the petition was “not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage [over the New York Attorney General] and as an effort to avoid a regulatory scheme.”
No Trustee or Examiner
Judge Hale addressed the question of whether a trustee or an examiner would be in the best interests of the creditors and the estate under Section 1104.
Outside bankruptcy, Judge Hale said that the NRA could pay its creditors in full more quickly than through a chapter 11 plan. Also outside bankruptcy, the NRA could fight the New York Attorney General and pursue reincorporation in Texas. Those facts, he said, weigh against having a trustee or examiner, because neither would be in the best interests of creditors and the estate.
Judge Hale’s Conclusion
In the last section of his opinion, Judge Hale said there were “several aspects of this case that still trouble the Court, including the manner and secrecy in which authority to file the case was obtained in the first place, the related lack of express disclosure of the intended Chapter 11 case to the board of directors and most of the elected officers, the ability of the debtor to pay its debts, and the primary legal problem of the debtor being a state regulatory action.”
Because the moving parties had not sought dismissal with prejudice in their original motions, Judge Hale dismissed the case without prejudice. But “should the NRA file a new bankruptcy case,” Judge Hale said he “would immediately take up some of [his] concerns . . . , which could cause the appointment of a trustee out of a concern that the NRA could not fulfill the fiduciary duty required by the Bankruptcy Code for a debtor in possession.”
Following a 12-day trial with 23 witnesses, Bankruptcy Judge Harlan D. Hale dismissed the chapter 11 petition filed by the National Rifle Association, finding that the filing was “not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage in the [action by the New York Attorney General to dissolve the NRA] and as an effort to avoid a regulatory scheme.”
Judge Hale found that the NRA was “in its strongest financial condition in years” and that its “primary legal problem [was the] state regulatory action.” As a “solvent and growing organization,” he said that “using this bankruptcy as a tool to win the dissolution lawsuit” was “not an appropriate use of bankruptcy.”
Judge Hale dismissed the case “without prejudice,” meaning that the NRA can attempt chapter 11 reorganization once more.
However, Judge Hale ended his 37-page opinion on May 11 by warning the NRA that he may appoint a trustee if the organization files again, given the “cringeworthy facts” that came out during trial. He also alluded to the “surreptitious manner” in which the petition was filed, saying it was “nothing less than shocking.”