The Bottom Line

The Northern District of Texas Bankruptcy Court in In re National Rifle Association of America and Sea Girt LLC, Case No. 21-30085 (Bankr. N.D. Tex. May 11, 2021), ECF No. 740, dismissed the National Rifle Association bankruptcy cases on grounds the filing was “not for a purpose intended or sanctioned by the Bankruptcy Code.” The court determined the bankruptcy petitions were filed in an attempt to gain unfair litigation advantage in an enforcement action brought by the New York attorney general and therefore were not filed in good faith.

What Happened?

Case Background

In mid-2017, at least two members of the National Rifle Association of America (NRA) board of directors, including Wayne LaPierre (LaPierre), were made aware the New York attorney general (NYAG) was opening investigations into the NRA. Fast forward to August 2020, when the NYAG filed a complaint in New York state court (NYAG Complaint) commencing the “NYAG Enforcement Action” naming four defendants: (1) LaPierre, (2) John Frazer (Frazer), the NRA’s general counsel, (3) the NRA’s former treasurer and chief financial officer, and (4) the NRA’s former chief of staff. The NYAG Complaint made a number of allegations of impropriety by LaPierre, including (i) exploiting the NRA for his financial benefit and the benefit of a close circle of NRA staff board members and vendors, (ii) intimidating, punishing and expelling anyone at a senior level who raised concerns about his conduct, and (iii) hiring and retaining in senior positions individuals who would enable LaPierre to control the organization. The other defendants were accused of various forms of impropriety as well. The NYAG Complaint sought (i) dissolution of the NRA, (ii) restitution of certain funds paid to current and former officers, (iii) a ban on certain former officers, including LaPierre and Frazer, from serving as fiduciaries of any New York charity, and (iv) avoidance of certain transactions. Notably, certain of the allegations in the NYAG Complaint were also addressed in a “whistleblower memo” presented to the NRA Audit Committee in mid-2018. By the time the NYAG Complaint was filed or shortly thereafter, the NRA already had pending actions against the NYAG and was facing a lawsuit initiated by the District of Columbia attorney general against the NRA and the NRA Foundation.

On Jan. 7, 2021, the board of directors passed a resolution approving an employment agreement for LaPierre, which, unbeknownst to the remaining board of directors, permitted him to unilaterally authorize a bankruptcy petition. Approximately a week later, on Jan. 15, 2021, the NRA and Sea Girt LLC filed for bankruptcy at the direction of LaPierre. Prior to the bankruptcy filings, the board of directors did not have any discussions of bankruptcy, Chapter 11 or any possible reorganization. The only individuals at the NRA (other than LaPierre) who knew about the potential bankruptcy filings were three members of the newly formed “Special Litigation Committee” and the NRA spokesman.

In the first few weeks of the bankruptcy filings, Ackerman McQueen, Inc. (a former vendor and litigation adversary of the NRA), the NYAG and the District of Columbia filed motions to dismiss the Chapter 11 cases or, in the alternative, appoint a Chapter 11 trustee.

Bankruptcy Court Decision

Following a trial that continued over 12 days with 23 witnesses, the court determined there was cause to dismiss the NRA’s bankruptcy cases and that appointment of a trustee or examiner would not be in the best interest of creditors and the estate at the present time.

Section 1112(b)(4) contains a nonexclusive list of what constitutes “cause” for dismissal, though the Fifth Circuit Court of Appeals has determined bankruptcy courts have flexibility in determining “cause” for dismissal, which can include a finding that the debtor’s bankruptcy filing is not in good faith. To determine the NRA’s primary purpose for filing for bankruptcy, the court evaluated the various reasons the NRA stated: (i) the cost of ongoing litigation, (ii) the need for a breathing spell and an opportunity to centralize litigation, (iii) to emerge from bankruptcy as a company domiciled in Texas, (iv) the desire to “modernize” the organization and (v) to reduce operating expenses, address burdensome executory contracts and unexpired leases and streamline a claims process through a confirmed plan of reorganization. However, the court found these reasons seemed improbable given there was consensus among the witnesses that the NRA was in its strongest financial condition in years at the time of the bankruptcy filing. In fact, LaPierre testified that even if the bankruptcy cases were dismissed, the NRA could pay all of its creditors in full and meet its obligations. The court determined that the NRA’s desire to reincorporate in Texas appeared to be a means of achieving its primary purpose — avoiding dissolution as a result of the NYAG Enforcement Action.

Once the court established that the NRA’s primary reason for filing for bankruptcy was to avoid dissolution, the court evaluated the “totality of the circumstances” to determine whether avoiding dissolution was a valid purpose to file a bankruptcy petition and whether the bankruptcy was filed in good faith. The court distinguished the NRA’s situation from that of a “traditional” bankruptcy case, in which the debtor faces a monetary judgment it cannot satisfy and the regulator can utilize the claims reconciliation process to recover. Instead, here, the NRA was using the Chapter 11 process to undermine the remedy provided for under state law and effectively deprive the state of New York of the ability to regulate not-for-profit corporations. The court determined, based on the totality of circumstances, that the NRA’s bankruptcy petition was filed in an effort to gain an unfair litigation advantage in the NYAG Enforcement Action and to avoid a regulatory scheme. Accordingly, the court concluded the bankruptcy cases were not filed in good faith and must be dismissed.

The court briefly addressed its decision to deny appointment of a trustee or examiner, noting that it appeared the NRA “has made progress since 2017 with its course correction” and it appeared from the testimony that the NRA “now understands the importance of compliance.” The court determined that the NRA’s course correction, financial stability, continued improvement of governance and internal controls, and a number of other reasons weighed against keeping the NRA in bankruptcy with the appointment of a trustee or an examiner.

Why This Case Is Interesting

The court dismissed the NRA bankruptcy cases without prejudice, but warned the NRA that should it file a new bankruptcy case, the court would “immediately take up some of its concerns about disclosure, transparency, secrecy, conflicts of interest of officers and litigation counsel, and the unusual involvement of litigation counsel in the affairs of the NRA, which could cause the appointment of a trustee out of a concern the NRA could not fulfill the fiduciary duty required by the Bankruptcy Code for a debtor in possession.” It thus left the door open for the NRA to file again but cautioned it to think long and hard about doing so. If the NRA files in the near term, it seems the court might have little hesitation in appointing a trustee.