The Bankruptcy Court for the Northern District of Texas dismissed the National Rifle Association’s (NRA) bankruptcy case on May 11, 2021, finding that the case was not filed in good faith. In his opinion, Judge Hale found that there was cause for dismissal because the case was filed “to gain unfair litigation advantage and … to avoid a state regulatory scheme,” neither of which he considered to be a purpose sanctioned by the Bankruptcy Code.
The dismissal order comes against the backdrop of a lawsuit brought by the New York state attorney general back in 2020 which sought to dissolve the NRA for its leadership’s diversion of millions of dollars away from the group’s mission for personal expenses and other questionable expenses. In public statements made around the time of its bankruptcy filing, the NRA indicated that it was filing bankruptcy in order to escape what it described as New York’s “corrupt political and regulatory environment.” Against this backdrop, the New York attorney general’s office sought dismissal of the NRA’s bankruptcy case, arguing that it had been filed in bad faith. After weeks of discovery, Judge Hale held a 12-day hearing on the motions to dismiss and the motion to appoint an examiner, with 23 witnesses testifying. He ultimately granted the motion to dismiss and denied the motion to appoint an examiner.
Relying on three main factors, the court found the primary purpose of NRA’s bankruptcy filing was to avoid a potential dissolution in the attorney general’s enforcement action. First, at the time of petition, not only was the NRA solvent, but it was also in the “strongest financial condition in years”. In addition, the court found no evidence suggesting that the NRA filed bankruptcy to reduce operating costs, to address burdensome executory contracts and unexpired leases, or otherwise to obtain a breathing spell, each of which would have been a valid exercise of bankruptcy jurisdiction. As its chief financial officer testified, there was no financial reason for the NRA to file bankruptcy.
Second, the court was not persuaded by the NRA’s claim that it filed bankruptcy to transfer domicile from New York to Texas. The court pointed out that not only can the NRA transfer domicile outside of bankruptcy, this alleged purpose to file bankruptcy also failed to explain the timing, as the testimony during the trial showed that the transfer had been contemplated by the NRA leadership for some time.
Third, existing litigation faced by the NRA did not pose an imminent financial threat to the NRA’s financial security. Although the NRA claimed that the bankruptcy proceeding would streamline litigation and reduce legal costs, it admitted that the costs of going through a bankruptcy would also be high. In addition, the NRA had not conducted an analysis of the cost of proceeding with litigation outside of bankruptcy versus the cost of the bankruptcy and proceeding with the litigation in bankruptcy. These factors led the court to find that the NRA’s utilization of bankruptcy proceedings was for the sole purpose of avoiding New York State’s regulatory scheme.
Although the good faith requirement in bankruptcy filings is a case-by-case inquiry, it is important that the court distinguished governmental enforcement actions aiming to dissolve the organization from litigation that poses the risk of liabilities and threaten the existence of an organization. While the facts at issue for the NRA are rather extreme, the decision underscores the importance of debtors clearly articulating legitimate purposes for any bankruptcy filing and following adequate corporate governance when making such a decision. Finally, the case highlights the strategic importance of selecting the best venue given the different standards that courts use in evaluating bad faith for bankruptcy filing purposes.
